I thought the same thing as you @Colflan, if Sol Patts are backing them then maybe there's still a functioning business in RFG. I redid my valuation, which is now a bit lower, but I think the main reason for that is that I think I might have had my estimate of the total share count wrong previously. At any rate I put in an opportunistic bid at 7c.
Soul Patts also backed Quickstep (QHL) and owned around 20% of QHL for many years, and they've now either sold down, or out, or been diluted below 5% by a number of capital raisings by QHL. SOL are long term investors, so they are happy enough if a company takes a decade or more to come good for them, as long as the payout is high enough to justify the wait, and they have done very well over the years out of companies like TPG, NHC and BKW, however some of their smaller investments (like QHL, and now RFG) don't always work out as they would have liked.
That's the result of investing the same amount into SOL, QHL and RFG 10 years ago (dividends not included), so based on that perhaps an investor would be wiser to invest in SOL rather than into one of the smaller companies they choose to invest in.
With companies like RFG, assumptions can be dangerous - or at the very least, can lead to valuations that end up being a fair way off reality. The main thing about RFG continues to be their debt, and the power of their lenders to influence the decision-making ability of RFG management. Debt covenants include a number of things that have been agreed upon between the lender and the borrower, and if ANY of those things are not adhered to completely, it will usually allow the lender to call in the debt immediately, which can mean winding up the company if their NTA is less than what they owe, which was the case last time I looked at RFG (which was around the middle of last year - 2022). The reason why nobody has tried to takeover RFG is that they had negative NAV - they owed more than they owned, so they did NOT look like a bargain at any stage in the past few years. SOL are often contrarian investors, so perhaps they see something here that others don't, but I would bet that the terms that SOL are demanding in return for their backing are going to benefit SOL a lot more than they are going to benefit RFG. In other words, the lender will almost always retain the upper hand when giving a lifeline to a company in RFG's position.
I do not hold SOL or RFG shares, but if I was forced to choose, I would choose SOL over RFG every day of the week.
20-Jan-2023: Looks like RFG may have possibly bottomed as well - here's their 12 month chart with the buying and selling points of substantial shareholder Castle Point Funds Management - as explained in their announcement yesterday: Change-in-substantial-holding-for-RFG-Castle-Point-Funds-Management-18-Jan-2023.PDF
Interestingly, after recently selling 1.45% of RFG's shares on issue (selling down from 9.12% to 7.67%), Castle Point Funds Management still hold 7.67% of RFG, but they've made some money on them lately, buying at prices between 5.4c/share ($0.054) and 5.6c/share ($0.056), then selling during a period in which the RFG share price closed between 6.8c/share and 9.2c/share and got as high as 9.5c/share. The RFG share price appears to have bottomed on June 30th last year when they closed at 3.9c/share after making an intra-day low of 3.8c/share. Their share price closed today at 10.5c/share (up +11.7% or +1.1c/share today) on no new news it seems.
Yesterday's announcement (Change-in-substantial-holding-for-RFG-Castle-Point-Funds-Management-18-Jan-2023.PDF) wasn't a buy trigger, as that announcement was just that CPFM had reduced their RFG exposure from 9.12% to 7.67%, having done no buying since October last year, and plenty of selling through December and January.
RFG's most recent announcement to the ASX prior to that one was on December 23rd: Settlement-of-ACCC-Proceeding.PDF. As you read through that one, it starts off looking positive for RFG, in that they have settled the proceeding, so now have the ACCC off their backs, at least in relation to the issues disclosed in the announcement, which were (a) selling loss-making businesses (RFG franchises) to franchisees without telling them they had been operating at a loss (and in fact representing that they were profitable) and (b) demanding that franchisees contributed to a "Marketing Fund" that was then used to pay for things that were not related to marketing, particularly in the case of Michel’s Patisserie franchisees, and that being a contributing factor in those franchisees NOT being able to make profits from their franchises.
While RFG proudly point out that the agreement they have reached with the ACCC will result in the ACCC proceeding being dismissed, without RFG:
(1) making any admission as to the ACCC’s allegations in the proceeding;
(2) paying any pecuniary penalty; or
(3) being subject to any injunction, disclosure or adverse publicity order.
...they have also stated that as part of the agreed resolution, RFG has entered into an undertaking with the ACCC under section 87B of the Competition and Consumer Act 2010 (Cth), and pursuant to that undertaking, RFG will pay an agreed discrete sum to, and waive certain prior debts owing by, relevant franchisees who acquired corporate stores, calculated based on their individual dealings with the Company, and also pay an agreed sum to certain franchisees in connection with the Michel’s Patisserie marketing fund. RFG has also agreed to contribute towards the ACCC’s legal costs.
The total amount that is to be paid to franchisees by RFG under the undertaking is $8,035,055.
The total amount of franchisee debts to be waived under the undertaking is $1,819,763.
The amount that RFG will be contributing towards the ACCC's legal costs has not been disclosed in this announcement.
The "Undertaking" that RFG has agreed to with the ACCC has been disclosed in full and starts on page 2. It really does describe a pattern of unethical behaviour on the part of RFG that has been well discussed here already but that is still quite shocking really - that a corporation could conduct such behaviour and still have serious expectations that their business would still be thriving in 5 and 10 years time, when obviously their business model depended in no small part on the majority of their franchisees being individually profitable and also reasonably happy with the parent company (RFG, the franchisor). It is clear that the way they ran the parent business was all about making short term profits with little regard for the longer term success of the company and it's franchisees.
Of course, this settlement with the ACCC does in no way mean that any of the various class action lawsuits that RFG are facing will be discontinued. If anything I would regard this outcome as providing the lawyers representing the franchisees with further ammunition against RFG. It may have been WORSE still for RFG if they had continued and lost the case rather than settled at this point, but the fact that they have agreed to make those payments to former franchisees (detailed above - as part of this settlement) doesn't make them look innocent of any wrongdoing. In fact, the opposite is true.
Have a look at the point 31(c) below (from page 6) that I have highlighted in Blue.
As you can see, this undertaking and the payments made to former franchisees by RFG under this undertaking (agreement) "in no way" impacts in a negative way (derogates) the rights and remedies available to any other person arising from the alleged conduct. So it's still full steam ahead with the class actions.
The point I have highlighted in green above (point 29 on page 6) about the "Compliance Program" that RFG have agreed to it very interesting. The details of that Compliance Program are spelled out in Annexure B on pages 10 to 15 inclusive - so there are 6 pages of details about the compliance program that RFG have agreed to adhere to as part of this settlement with the ACCC. That link again: Settlement-of-ACCC-Proceeding.PDF
The whole thing has been signed by Peter George, the executive Chairman of RFG and also by their official company secretary, Anthony Connors. And they have agreed to allow the ACCC to monitor compliance in any way the ACCC sees fit including (as shown at point 30 on page 6 - see above) that... "The ACCC may make reasonable inquiries concerning compliance with this Undertaking, and RFGL must provide documents and/or information sought pursuant to those inquiries within the reasonable time stipulated by the ACCC."
I was concerned that RFG would not be able to meaningfully reinvest in and strengthen their remaining brands because they were beholden to their lenders, but they now have the ACCC watching their every move as well, and while that may well have been the case before, the main difference is that now RFG has agreed to give the ACCC pretty much unlimited access and have provided a written undertaking to reform their own business to properly look after the interests of their franchisees and operate in a much more ethical manner.
It's all positive for their remaining RFG franchisees of course, so definitely a welcome development, however I'm still not tempted to "invest" any money into RFG. Sure, their share price is "on the up" right now, but look where they've come from:
So while there is clearly money to be made trading stocks like these - as Castle Point Funds Management has clearly demonstrated with their announcement yesterday - when you've got poor management, these companies tend to make poor longer term investments. That might all change from here of course, and they're clearly heading in the right direction over December and January, but they're far from out of the woods yet. And I won't be going near them. There just isn't a pole long enough. People have been calling the bottom on RFG at various times over the past five years, but very few of those people have been right, and they may ALL prove to be wrong if RFG has another decent leg down.
And they could. They are in a world of legal pain with class actions and they were barely profitable in FY22, with a statutory NPAT of just $5.3m (FY21: $1.5m) and an "Underlying EBITDA of $21.5m (FY21: $26.9m)". They've just agreed to pay over $8m to former franchisees and write off another $1.8m of franchisee debt, plus they have agreed to pay an undisclosed sum of money towards the ACCC's (substantial) legal costs. Plus they have also agreed to a new compliance program that is going to cost them significant money as well. Things could easily turn south again from here. Just saying. Contrary to what some technical analysts will claim, a share price graph does NOT tell you everything you need to know about a company.
@Bear77 and @Confusedous - I'm not sure the cultural problems at RFG have been fully rectified.
I understand that 130 Michels Patisserie franchisees have a class action directed at RFG presently:
https://thenewdaily.com.au/finance/finance-news/2021/10/19/rfg-class-action/
In the last week, further adverse press regarding RFG's poor relations with franchisees:
https://www.news.com.au/finance/business/retail/we-gave-them-all-we-could-retail-food-group-drags-failed-franchisees-to-court-over-unpaid-debts/news-story/6e125d122167192923a31c3694995021
I'd personally being looking to invest elsewhere.
To @Confusedous - thanks for your bull case straw on RFG. I think the problem is that you can't buy "Crust" alone, it comes with all of the other franchises when you buy RFG stock, and of course their significant debt, which I've already discussed. That's the main reason why PE (private equity) have steered clear of RFG, because RFG have negative net tangible assets (negative 2 cents per share at last report). In other words their liabilities are greater than what they actually own in terms of tangible assets. That leaves out "goodwill" or brand value and other intangibles, and RFG have historically been very heavy on intangible assets, so stripping those out is a sensible way of looking at the true value of the business in a "break up and sell off" scenario, which is how PE tend to look at these prospective opportunities.
Also, I think you'll find "Crust Pizza" isn't as popular everywhere. It certainly doesn't do as well as Dominos does here in my home state of SA. I think the issue is that "Crust" is positioned as a premium brand of pizza, and Dominos is seen as the budget player in pizzas, although they do cater for those who want to spend more money on their pizzas as well. Also, Dominos advertising is everywhere here, and Crust is rarely advertised. Our family have only tried "Crust" pizza once, and we were not impressed enough to try it again. However, a lot of that has to do with the fact that the nearest "Crust" is about 10km away, and we have about 6 Dominos within 3 or 4 km of our home, plus about 8 other privately owned pizza shops, including a great wood-oven pizza and Italian restaurant just around the corner.
If things do get tougher here, such as in a recession scenario, I would back a budget chain like Dominos to navigate through those times more easily than a chain like "Crust" that charges significantly more for the pizzas. As I said in my other post (and in this forum thread), always best to mount a Bear case for a prospective investment before you buy it, just to give you some balance. You can still buy if the Bull case is compelling enough and outweighs the Bear case. I think in the case of RFG, it's probably dangerous to base a Bull case on experience with just one or two of their franchisee's stores, and only looking at one of two of their brands. There's a lot more to RFG than that, and not all of it is good.
Disclosure: I do NOT hold RFG or DMP shares, and have no intention of buying into either company. I don't see either as one of the best investment opportunities available, and at the end of the day we should really be putting our money into those investments we regard as being the best available, with the best likely returns for our invested dollars over our desired timeframes.
Further Reading:
Related Party Dealings as reported in 2018: RFG's secret deal to manage stores under scrutiny (smh.com.au)
June 2018: Why I think Retail Food Group Limited (ASX:RFG) shares could fall much lower (fool.com.au)
August 2018: Donut King operator Retail Food Group slumps to $307 million loss (nine.com.au)
December 2019: Retail Food Group CEO Tony Alford drops defamation case against SMH, The Age
December 2020: ACCC takes action against Donut King, Gloria Jeans owner Retail Food Group (smh.com.au)
And (also December 2020): ACCC accusations smash Retail Food shares (afr.com)
May 2021: Retail Food Group Limited goes back to its core business (proactiveinvestors.com.au)
February 2022: Retail Food Group profit rises as Gloria Jean's Drive Thru, Crust Pizza bake in growth (businessnewsaustralia.com)
The following slides are from their H1 FY22 Results Presentation released to the ASX on 23rd February 2022:
Source: RFG's Half 1 FY2022 Results Presentation, released to the ASX on 23-Feb-2022, see here: 2924-02490523-2A1358599 (markitdigital.com)
The above slides have just been cherry-picked by me to show just some of the stuff you need to worry about with RFG as they are in 2022. For a fuller picture, read the entire presentation (link above) and the accompanying Results Announcement and business Update (released on the same day, 23-Feb-2022).
At 31-Dec-2021, RFG had Net Operating Cashflow for the half of $5.6m, Statutory NPAT of $5.1m for the half, "Underlying NPAT" of $7.4m, cash of $32.2m, and Gross Debt (as shown directly above) of $46.2m, of which at least $42.3m is currently due to be repaid in full by November this year (i.e. within the next 6 months) unless they can kick that can further down the road by getting their lenders to agree to extend the maturity date or else by refinancing the debt with someone else (likely at a higher interest rate now in the current rising-interest-rate environment).
They claim "Net Debt" of $21.2m, because one of the conditions of their debt is that they only claim a maximum cash offset of $25m, presumably the other $7.2m of cash that they had at 31-Dec-2021 would be required to continue to operate the business as a going concern.
Because their cash, cashflow and profits can not service and pay off that debt by the due date (November 2022), RFG have five options as I see it:
- They can raise more capital, but I would expect that a capital raise would need to extinguish their debt entirely or their lenders would not agree to it; or
- They can sell assets to pay off their debt, however that would have to be done with the agreement and permission of their lenders (because of existing lending covenants), and the assets would likely only sell at "fire-sale" prices because they are forced sellers, or
- They can refinance the debt with another lender, possibly at higher rates, if they can find one willing to lend to them, or
- They can get their lenders to agree to extend the maturity date of their existing lending facility (senior debt facility), or
- They can call in the administrators.
I know Peter George, their current Executive Chairman, is a turnaround specialist, but as I have said previously, he doesn't have much to work with, in my opinion. Another capital raise of the size needed to extinguish their senior debt (option 1 above) would be massively dilutionary, and would send their share price even further south. It would not be welcomed by the market, at all! I don't think they can afford to sell assets to pay off their debt because their tangible assets add up to less than the value of their debt, so that's also not really a very realistic option. They could reduce their debt, but that won't cut it; at this point they need to pay back the full $42.3m to the bank by November. Options 3, 4 and 5 are the only realistic options available, and option 5 is really the "final solution" (going broke), so they'll only do that if all else fails obviously. Which leaves options 3 and 4, meaning that RFG's future is entirely in the hands of the people they owe money to, or will owe money to (if they refinance). Which makes them a very "risky" investment indeed. And option 5 is still the likely end-game, whether it be this year or next year, or the year after. The banks have already taken a substantial haircut (via debt forgiveness, i.e. debt that has already been written off) in prior years, so I doubt they are likely to keep stringing this out if they see no realistic likelihood of getting all or most of their money back. The ball is really in their court (the banks I mean), as it has been for a couple of years now. And it's important to realise that if you're an RFG "investor" or are thinking of becoming one.