A Relook at Retail Food Group

Retail Food Group Limited (ASX: RFG) is a food and beverage company, HQed in Queensland. Retail Food Group Limited was officially listed on ASX in 2006. Recently, the company via a release dated 9th July 2019, updated investors about its response to the media article published in the Fairfax press. In continuation with the company's previous announcement, Retail Food Group has been exploring a range of debt reduction options, which include equity and debt funding proposals and had already received an indicative non-binding proposal from an investment fund associated with SSG Capital Management, Soliton Capital Partners. In addition, the discussions related to the proposal have advanced, however, remains subject to the number of conditions precedent. The company has granted limited exclusivity to Soliton and due diligence related to the same has been undertaken.

As per the release dated 6th May 2019, the company published its response related to the product date extension. Retail Food Group Limited stated in its response that it had granted product date extension after written approval from the supplier as it follows a strict standard with respect to the quality of food. Nevertheless, the company took voluntary actions and has been in the process of withdrawing any products, which were approved for product extensions from its suppliers.

Furthermore, Retail Food Group Limited works in tandem with the preferred suppliers to ensures that high-quality products are delivered ready for sale to franchise stores. During the financial year 2018, the company worked closely with over 1,000 Australian suppliers to provide more than 15,000 products through its distribution network.

The company performs a regular audit for its distributors and suppliers, and if it is deemed that any supplier has contravened the applicable food safety regulation, then that supplier will be removed supplier from the company’s supplier network.

Additionally, RFG provided an update to the market about the asset sale process through a release dated 3rd April 2019. In terms of the potential sale of QSR and Donut King, the company ended negotiations with the potential buyer as RFG was unable to reach the binding agreement with the associated party due to the terms and conditions of the agreement, however, Board considered the non-occurrence of this deal as in the best interest of Retail Food Group Limited. The company’s top management expressed that any potential sale of the assets must be at a price not only accepted by the Board but should be in the best interest of shareholders as well.

Lately, S&P Dow Jones Indices made an announcement with respect to the quarterly rebalance of the S&P/ASX indices. Accordingly, Retail Food Group Limited has been removed from the S&P/ASX 300 Index effective 18th March 2019.

Moving to the financial side of things. The company reported revenues amounting to $192.0 million in 1H FY19 against $195.5 million in 1H FY18, reflecting a decline of 1.8%. The revenue included $13.1 million arising from the adoption of new AASB 15 revenue standard comprising consolidating franchise marketing funds. The underlying EBITDA witnessed a decline of 47.7% in 1H FY19 and stood at $23.9 million. The results of the FY2019 first half were impacted by continued difficult trading conditions and closure of domestic outlets. The company during the period implemented many cost reduction and major restructuring initiatives throughout the group and incurred substantial restructuring expenses, including staff redundancies, asset write downs and disposals, and the closure or exit of certain non-core businesses and premises.

Turning to the divisional performance in 1H FY19, the domestic bakery/café division reported EBITDA of $8.7 million. Same-store sales experienced a decline during the period, primarily attributed to Michel’s Patisserie brand system. The company’s operational focus includes product innovation, network compliance and operational excellence. For the Coffee Retail division, the same-store sales declines were affected by Gloria Jean’s exposure to shopping centres and ineffectiveness of tactical initiatives. For Domestic QSR division, the company reported EBITDA of $5.9 million as compared to the EBITDA of $6.0 million in 1H FY18, representing a decline of 2.1%. The trading revenues witnessed a rise during the period, which was driven by the vertically integrated product supply into QSR in 1H19.

For Manufacturing and Distribution division, RFG reported revenues of $81.7 million in 1H FY19 as compared to $80.7 million, reflecting a rise of 1.3% and negative EBITDA of $2.3 million, reflecting a decline of 131.7% on pcp. The foodservice witnessed various operational challenges subsequent to the integration of AFS into HPC facilities in 2H FY18, which resulted in a decrease of $10.9 million in sales revenue in 1H FY19, increased operating costs on previous comparable period, and failure to fully extract synergy opportunity. The Dairy Country reported increased revenues by $20.0 million on the previous comparable period via increased processing volumes, which was offset by additional overhead costs of operating a second Dairy Country facility, and a reduction in the margin on increased wholesale manufacturing sales. The division is focused on remedial restructuring program and management renewal in Foodservice in order to rectify operational issues and improve service levels, which is anticipated to be completed by the end of 2H FY19. The company is tendering for additional production volumes with new and existing customers to drive economic returns from the company’s investment in the second DC facility.

The gross margin of the Retail Food Group Limited stood at 32.8% in 1H FY19 compared to the industry median of 55.1%. The company reported current ratio of 0.54x in 1H FY19 against the industry median of 1.20x and asset to equity ratio of 25.03x as compared to the industry median of 1.91x. The debt to equity ratio for the period stood at 13.29x in 1H FY19 against the industry median of 0.36x.

Strategy and Outlook: The company has a six-pointer strategy plan, which will lead to business improvement. The company’s six point plan is aimed at debt reduction, business stabilisation and operational improvements amongst its business units. RFG is refocused on discontinuing its non-core underperforming business units as well as refocused on its coffee supply operations and core retail food franchise. In order to improve the financial stability, the company is focused on strengthening its balance sheet and is planning to improve the health of the domestic franchise network via a significant increase in product category extensions and new product campaigns.

The company is putting a lot of emphasis on driving growth in the franchise business by leveraging a healthy network as a platform for new store sales and increased renewals as well as capitalising on the existing international opportunities. The company have executed several measures to stabilise the performance and support the six point plan. RFG is actively considering options to decrease debt, but the definitive decisions are yet to be made.

Assuming full year contributions from all business units and the realisation of forecasted annualised restructuring benefits, the company anticipates FY19 underlying EBITDA in the ambit of $43 million to $48 million.

At the time of writing on 15th July 2019 (AEST 02:15 PM), the stock of RFG was trading at a price of $0.185, with a market capitalisation of $33.81 million. The stock has produced returns of 15.63%, -11.90% and -45.59% for the one month, three months and six month period, respectively.

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