For anyone interested, makes good reading!
29-Apr-2022: While the ASX200 fell 38 points over this past week, it did end the week on a positive note with a 78 point gain to 7435 (+1.1%). A positive lead from the US coupled with end-of-month book squaring and window dressing helped. There were also further rumours that Chinese stimulus is coming, which fed into the positivity. All sectors here were in the green today:
Source: EOD newsletter from MarcusToday
However, not all companies were in positive territory. One company I keep circling back to every so often is Retail Food Group (RFG). RFG closed flat today but during the day they tagged 6.5 cps ($0.065) again, as they did back in February. 6.5 cps is their 12-month low. I'm not a technical trader and I don't claim to be a "chartist", but the following chart analysis from Commsec on the RFG chart has me somewhat baffled:
I'm talking about that rubbish in the bottom right there directly below the share price and volume charts. They're in a "strong near-term rally" are they? OK?!?
I've said plenty on RFG before. Horrible company. Treated their franchisees very poorly. Always put short-term corporate profits before sustainable business development and doing the right thing by their shareholders, franchisees and other stakeholders. The only people that were truly looked after were their own management. Their MO was to roll up other franchise companies that had been built up by others, then strip out any cash, reduce costs, make a bundle, don't invest back into these businesses any more than they absolutely have to, rinse and repeat. Little wonder it all came crashing down around them after their business practices were exposed in the media.
Plenty of people still claimed there was a viable business in there that had been ridiculously oversold, but they just keep going lower. Here's their ten-year chart:
Not too much value there since 2016, eh! Notice the massive volume increase in 2020/2021. There was actually plenty of share price volatility during that period, however if you look at it in the context of their $4 to $8 trading range in the 2014 to 2017 period, it's pretty insignificant. Here is that 2020/2021 period when you zoom in on it:
Here's RFG's financial metrics, according to Commsec:
Remember you can click on the image to make it larger and easier to read, then click again to return to this post.
Despite some people saying that they no longer have a debt problem, their last report showed gearing at 66.8% according to Commsec. They have returned to high single digit ROE (9.5% at last report and 8% ROC) but their NTA per share is apparently negative two cents and their total shareholder return (TSR) has been negative for the past 5 years in a row: -10.8% in FY17, -88.1% in FY18, -75.9% in FY19, -46.1% in FY20 and -4.2% in FY21. They have underperformed the market in terms of total return by -25.1%, -100.7%, -87%, -38.9% and -34.5% respectively in those 5 financial years, as shown above ("Total Return (%) +/- Market (%)").
This is most definitely NOT a company where you can look at past performance, such as their 2015 to 2017 period, and look forward to them returning to that level of form. That ain't happening. They've sold off so many assets and restructured the business. They are not the same company they were then and they never will be. Have a look at those sales, cash flow and earnings numbers then versus now (above). They are but a shadow of what they once were. And that's being generous.
They obviously haven't paid a dividend since 2017 and are unlikely to start paying dividends any time soon, certainly not with the debt that they've got, so any positive return you get has to come from share price appreciation, and they just made a year low again on a positive day for the market.
If there is a genuine bull case for RFG I'd like to hear it. My own thoughts are that with so many WONDERFUL, HIGH QUALITY companies out there that we can invest in, WHY oh WHY do people look to "invest" in rubbish like RFG?
20-Oct-2021: Michels Patisserie Class Action
The first three refer to a recent class action on behalf of Michels Patisserie franchisees and centres around RFG's switch from fresh to frozen food which many franchisees believed ruined the business, although there are other allegations involved also.
The last link is to the Phi Finney McDonald site which is part of their preparation for a class action against RFG on behalf of investors who acquired RFG securities (shares) between 18 April 2017 and 28 February 2018 (inclusive) (Claim Period).
Omni Bridgeway has agreed to fund the proposed class action. For more information and to sign up to obtain funding, please contact Omni Bridgeway at https://portal.omnibridgeway.com/cases/register/rfg-investor-class-action.
Some further info from that site:
RFG operates franchise networks in Australia and 58 international markets. These include Donut King, Brumby’s Bakeries, Michel’s Patisserie, Gloria Jean’s Coffee, Crust Gourmet Pizza, Pizza Capers Gourmet Kitchen, The Coffee Guy and Café2U. RFG’s Domestic Franchise networks accounted for 49% of Group earnings before interest, tax, depreciation and amortisation (EBITDA) in FY16 and 43% in FY17. RFG enters domestic franchise agreements with its franchisees and, in so doing, generates revenue through royalties on sales, equipment/brand upgrades, store renewal and various other upfront and ongoing fees (the Franchise Model). These fees and royalties are payable to RFG regardless of the franchise’s profitability. A series of Fairfax Media articles and RFG announcements from December 2017 to February 2018 revealed that RFG’s franchise model was under stress, that there had been serious structural deterioration in the financial performance of several domestic franchise networks, and that the value split between franchisee and franchisor required a fundamental rebalancing. From 7 to 18 December 2017, various Fairfax media reports and RFG announcements disclosed to the market that:
During the trading period 11 to 18 December 2017, RFG’s share price fell $1.75 (approximately 40%). On 19 December 2017, RFG disclosed to the market that its 2018 half year (1H18) net profit after tax (NPAT) would be materially lower than the prior corresponding period. In response, RFG’s share price fell a further $0.67 (approximately 25%). On 9 January 2018, RFG announced that 1H18 statutory NPAT would be less than the $22m previously forecasted on 19 December 2017. Following the announcement, the share price fell $0.15 (approximately 6%). On 2 March 2018, in its 2018 half year results, RFG disclosed a significant deterioration in the performance of its domestic franchise division, substantial asset impairments, and a proposal for 160-200 outlet closures by 2019 to address further financial deterioration for the Company. RFG was reinstated to quotation on 5 March 2018. The market reaction was immediate and visceral. By the close of trade, RFG’s share price had fallen a further $0.75 (approximately 36.5%).
Proposed Class Action
The proposed class action will allege that:
Class Action Registration
All current and former shareholders who acquired an interest in RFG securities during the period from 18 April 2017 to 28 February 2018 (inclusive) are invited to sign up to the proposed class action. Eligible investors may obtain an information pack by visiting https://portal.omnibridgeway.com/cases/register/rfg-investor-class-action.
If you would like to find out more from Phi Finney McDonald about the proposed class action, or have any queries, please contact us at firstname.lastname@example.org.
--- end of excerpt (from website - link above) ---
Disclosure: I did not hold RFG shares, so I will not be signing up for the class action.
The following picture is from that SMH article (titled: 'Greedy and unethical': Franchisees welcome ACCC action on RFG, link to the full article is directly above, i.e. last link) from 15th December (2020) about the ACCC action taken against RFG that has clearly provided more fuel/impetus for the current class action on behalf of former Michels Patisserie franchisees.
RFG annual results – moving in the right direction with a profit for the first time since 2017.
The company reported a profit of $1.5m for FY21 as compared with a restated loss for FY20 of $4m. Underlying NPAT rose from $18.8m to $23.2m.
This is a respectable result given the challenges of Covid and store lockdowns plus the restructuring costs as RFG comes out of a “near death experience” of a couple of years ago.
Debt has been reduced from $263m in FY19 to net debt of $19m as of July 2021. They are no longer at the mercy of their financiers and they have retained their best assets and disposed of the underperforming divisions.
There are one or two hurdles still to jump which is why the share price is only $0.08.
The ACCC action remains unresolved although there are suggestions this is close to a resolution. Petra Capital reports that RFG and the ACCC are in mediation and “that a settlement is the most likely outcome as it appears to be in the interest of both parties.” The new RFG management team seems particularly astute and capable having turned the business around in the last 3 years. We can reasonably expect them to resolve the mediation with the ACCC fairly and in the best interest of all stakeholders.
RFG continues to clean out underperforming stores. This past year, 85 domestic sites were closed permanently. The company has suggested the store rationalisation process in now virtually complete. Pleasingly, same store sales (SSS) for all divisions were positive for the first time since 2017 so clearly the new merchandising strategies are working. Highlights were Gloria Jean’s drive thru SSS up 17.8%, Brumby’s SSS up 9.1%, Pizza Capers SSS up 10% and Crust SSS up 6.7%.
Once the uncertainty of the ACCC action is resolved, RFG can look to grow the network again by selling franchises.
Franchising can be a wonderful business model if run properly. There are few business models with such an opportunity to expand for such little cost.
Disclosure – I own RFG IRL.
Makes very interesting listening. Hopefully RFG now on an upward trajectory after a dismal few years for franchisees and shareholders alike.
13-Sep-2020: In response to @Anni8's straw on RFG Debt, you are correct in that it has been some time since I looked at RFG's debt - it was just after the November 2019 capital raise and partial debt-forgiveness. However, their 28-Aug-20 FY20 Results Presentation says (on page 6) that their net debt was down to $33.1m (from $259.7m at 30-Jun-19), and their market cap is only $142m. While that is a big improvement, it's still a LOT of debt for such a tiny company (now). Furthermore, while their balance sheet shows net assets of $176.1m, I note that $238.1m of that was intangibles. If you remove those intangibles, you're left with net assets of negative $62m, i.e. net liabilities of $62m. In a wind-up situation, those intangibles, which are mostly brand value estimates as I understand it, would be written down considerably.
In their Appendix 4E and Full Year Statutory Accounts, RFG said (on page 1) that their "Net Tangible Assets/(Liabilities) per security" at 30-Jun-20 was (2.9) cents, i.e. negative 2.9 cents per share.
I've had a look at note 25 of their accounts, and it does indeed state that their net debt was down to $20.8m at 30-Jun-20, which is clearly a different number to the $33.1m net debt figure they provided in their presentation, and it looks like the difference is because (according to note 4 on page 6 of their results presentation) their "Net Debt is calculated in accordance with Senior Debt Facility Agreement definition, including maximum $25 million cash offset."
"Given the sale of Dairy Country for $19.2 million, it is probable that net debt will now be reduced to circa $1-2 million."
"I think you will agree that this level of debt is no longer life threatening for RFG and given the new direction and leadership under Peter George, I suggest we can reasonably expect survival and a much improved performance in the coming years."
Taking the second point first, I do have to agree that Peter George appears to have done a very good job of reducing RFG's debt VERY significantly, albeit mostly due to debt forgiveness (write-offs by their lenders). However, credit where credit is due. They are certainly in a MUCH better position now than they were 12 months ago.
Furthermore, I think my pronouncement of the death of RFG may well have been a tad premature, and you are right - they do now look to have a reasonable chance of survival, if the sale of Dairy Country for $19.2m proceeds as planned.
I do however note that while the BSA (business sale agreement) provides for a sale price of $19.23m, it is subject to net working capital adjustments, and also remains subject to a number of conditions, including FIRB approval. Assuming it goes through, and assuming that RFG's net debt position has not deteriorated since June 30 (which is a big assumption considering the COVID situation, particularly in Victoria), then it has the potential to wipe out the majority of RFG's net debt. However their actual debt at June 30 was $54.7m - excluding deferred borrowing costs, derivatives and financial guarantee contracts, as described in Note 19 - and their cash and bank balances was $33.9m, and in the current situation I would doubt that you could apply that cash to pay off the debt without crashing the company completely. In other words, I expect that much of that cash would be needed to keep the company afloat at this difficult time.
To summarise - you're right, they're in better shape than I thought they were. Agreed. However, they still have a negative NTA (or did, at June 30), and their balance sheet is still bloated with intangibles which I believe will be subject to significant write-downs in future years, should they last that long. And - every significant move they make, such as the Dairy Country sale, has to be approved by their lenders, as they stated in that announcement.
I still don't see PE circling, and I believe that's because RFG is light on real tangible assets, so they still don't look too appetising to Private Equity, as there isn't much left to sell off, versus the remaining debt.
Apart from Asset Sales (such as Dairy Country), I think the odds are that RFG's net debt position will get worse in H1 of FY21, mostly due to COVID, but also because their business and their revenue is shrinking with every asset sale, and if you keep selling assets, eventually there's nothing left. Also, many of their brands have been damaged, some of them perhaps irreparably. Just my opinion of course.
However, thanks for your straw Anni8, you are right, I wasn't aware of just how much RFG have managed to improve their net debt situation. They have certainly achieved a lot in the past year, and their chances of surviving have certainly improved.
I still wouldn't be buying RFG shares though.
Bear77, it must be some time since you last looked at the debt in RFG as the situation has improved tremendously since the capital raising in November 2019. ($193 million.) Note also the lenders did in fact take a haircut at the time, a loss of over $70 million so they shared some of the pain.
Reading from the most recent accounts, as of 30 June 2020, net debt was $20.8 million, down from $256 million in FY19. (note 25)
Given the sale of Dairy Country for $19.2 million, it is probable that net debt will now be reduced to circa $1-2 million.
I think you will agree that this level of debt is no longer life threatening for RFG and given the new direction and leadership under Peter George, I suggest we can reasonably expect survival and a much improved performance in the coming years.
02-April-2020: Further COVID-19 Update
On March 25th, RFG Updated the market on the impacts of COVID-19 on their business. Two days later they released a "Further COVID-19 Update" (on the 27th). Five days later (yesterday) they've released another "Further COVID-19 Update" (link above). This one is actually quite good, in that they have spent a fair bit of it explaining how they are attempting to assist their franchisees get through this. They need to, or the franchisees will just walk away, leaving RFG with a debt load that would finish them. RFG are also calling on the government to do more in relation to landlords refusing to reduce or waive rent. Apparently some landlords have agreed to defer rent, which, as RFG correctly points out, would just defer the full financial impact of this for those franchisees (send them broke later instead of earlier). As RFG says, that approach is unacceptable in these circumstances and is not in the spirit of what the government has been trying to achieve in relation to keeping such businesses viable and thereby providing tennants for those landlords when things normalise. It's easy to be cynical with a company like RFG who have treated their franchisees so badly for so long, but they do finally appear to be trying to do the right thing. Whether it's just because their own survival depends on it or not, it's still good to see.