JANUARY 27, 2016 Imvescor Restaurant Group Inc. IRG-T: $2.41 | Rating: Buy | Target price: $3.00 “Imvesting” with Franchisees Special Situations Michael Glen, CFA Elizabeth Johnston Special Situations Analyst Associate Tel: 514 350-2876 Tel: 514-350-2949 [email protected] [email protected] Imvescor Restaurant Group Inc. “Imvesting” with Franchisees Company Introduction .......................................................................................................................................................... 2 Brief Description of Each Imvescor Banner ........................................................................................................................................................... 3 Some Historical Perspective ................................................................................................................................................. 4 The Entrance of Frank Hennessey ........................................................................................................................................................................ 5 The Strategic Plan and Objectives ....................................................................................................................................... 7 Focal Points and Initiatives of the Strategic Plan ................................................................................................................................................... 8 The Renovation and Rejuvenation Plan ................................................................................................................................................................. 8 Explicitly Disclosed Financial Objectives ............................................................................................................................................................. 10 Discussion of the Retail Products and Strategy ................................................................................................................................................... 11 Brief Industry Overview - Canadian Foodservice ............................................................................................................. 13 Breaking Down Canadian Foodservice Sales ...................................................................................................................................................... 14 The Primary Challenge: Traffic Levels are Stagnant ........................................................................................................ 14 Winning the Year by Attracting Millennials ........................................................................................................................................................... 16 Strategies to Steal/Maintain Market Share ........................................................................................................................................................... 17 Financial Forecast ............................................................................................................................................................... 18 Valuation and Recommendation ........................................................................................................................................ 20 Risks ..................................................................................................................................................................................... 23 Management Profiles ........................................................................................................................................................... 24 Financial Statements ........................................................................................................................................................... 25 Appendix I – Important Disclosures ................................................................................................................................... 28 January 27, 2016 Michael Glen, CFA, Special Situations Analyst | i Imvescor Restaurant Group IRG-T – $2.41 Buy - Target Price: $3.00 Investment Highlights Initiating Coverage: Buy, $3.00 Target Price Imvescor Restaurant Group is a full-service restaurant franchisor . Strategic plan established, defined, with execution ongoing. Imvescor with 4 banners in operation. Approximately 98% of its 227 units are has undergone a significant amount of change over the past five years. franchised, with 56% of restaurants located in Quebec and 32% in And for those who followed the story closely, for a small-cap Canadian Atlantic Canada. Their two largest banners by location count are stock, the name certainly punched above its weight in terms of Pizza Delight (84 restaurants) and Mikes (73 restaurants). Current management turnover and speculative activity. Our view is that this system sales are approximately $370 million. phase is now firmly over for Imvescor, with the new management team, led by restaurant veteran Frank Hennessey, developing a reasonable and manageable long-term strategic plan to legitimately improve the underlying fundamentals of the core restaurant business. Success from restaurant rejuvenation program represents crux of investment thesis. The aging among Imvescor’s restaurants was one of the more eye-opening disclosures which the new management team illustrated to shareholders. While this disclosure largely confirmed what most observers already suspected (i.e. “fresh-rate” < 50%), it helped frame a discussion surrounding the scale of the effort that will be necessary to bring the franchise network to a more desirable state. In that regard, Source: BigCharts.com Imvescor developed a plan to help franchisees with the capital spending for restaurant renovations, committing up to $5.5M to be Market and Company Data spent on existing restaurants in the network. If accepted to the program, IRG would pay 20% of the cost to renovate “guest-facing” areas Ticker IRG-T FD Shares O/S (M)* 61.9 of the restaurant (i.e. dining room, bar area, reception, washrooms), up to RatingBuy Market Cap (M)* $149.3 a maximum of $50,000 per location. Imvescor’s expectation from the RiskMedium Float O/S (M)* 55.0 program is that repayment will only occur through an improvement in Price$2.41 Float Value (M)* $132.4 royalty revenue resulting from improved SSSG at renovated locations. As 1-Yr Target$3.00 Avg Daily Volume (k) 85.6 Dividend$0.09 Enterprise Value (M) * $152.8 such, the rejuvenation program works to significantly align Yield3.7% Ownership: * Imvescor’s success as a franchisor with the underlying results 1-Yr ROR 28% Mgmt and Directors: 12% of franchisees. 52 Wk High-Low $2.47-$1.44 Valuation 9.0x 2017e EBITDA Net Debt/EBITDA * 0.3x . Strong balance sheet supports rejuvenation program. Imvescor is Year End Oct. 30 Next Reporting Apr-16 well-capitalized, with leverage at 0.5x net debt/EBITDA at the end of EPS (FD) * f2015. Including proceeds from in-the-money warrants (5.5M warrants at Q1 Q2 Q3 Q4 Annual P/E $0.65), leverage drops to 0.3x. Based on our forecast, we see Imvescor in 2014 $0.05 A $0.04 A $0.03 A ($0.01) A $0.11 A 21.9x a net cash position at the end of f2016. Given an emerging excess cash 2015 $0.03 A $0.04 A $0.04 A $0.06 A $0.16 A 14.6x 2016 $0.04 $0.04 $0.05 $0.04 $0.17 14.4x scenario, Imvescor recently increased its dividend to $0.09 per year (from 2017 $0.18 13.3x $0.08) and announced the implementation of a normal course issuer bid for up to 5% (2.7M) of shares outstanding. In terms of the rejuvenation Adjusted / Operating EBITDA ($M) Q1 Q2 Q3 Q4 Annual EV/EBITDA plan, while we acknowledge that it is rare to see a franchisor provide 2014 $4.1 A $3.7 A $4.5 A $3.8 A $16.0 A 9.5x (forgivable) financial assistance to its franchisees, we do not view the 2015 $3.3 A $3.8 A $4.3 A $4.6 A $15.9 A 9.6x program or the size ($5.5M) as a risk to the balance sheet. 2016 $4.3 $4.0 $4.7 $4.5 $17.5 8.7x 2017 $18.9 8.1x . Conservative valuation and target multiple applied. We have selected * Market cap and enterprise value calculations fully diluted for warrants outstanding a target multiple of 9.0x f2017e EBITDA, which is roughly in-line to where Source: Company reports; Thomson; Bloomberg; LBS estimates. the stock is trading on its f2016e EBITDA. This multiple also represents a All pricing as of January 25, 2016. discount to where the overall U.S. peer group trades (i.e. 10.2x 2017e), which reflects the relative size and liquidity. Upon execution of the strategic plan and with the reporting of improved financial results, we firmly believe Imvescor could trade at a premium to the U.S. peer group, and more in line with MTY Food Group (Buy; $37.00 target) at 11.2x f2016e EBITDA and Cara Operations (Buy; $32.00 target) at 11.6x 2016e EBITDA. January 27, 2016 Michael Glen, CFA, Special Situations Analyst | 1 Laurentian Bank Securities | Equity Research Imvescor Restaurant Group Inc. Company Introduction Imvescor is a Canadian restaurant franchisor with ~$370 million in system sales generated across 227 restaurants (as of f2015). The company operates 4 distinct banners: Bâton Rouge, Mikes, Pizza Delight, and Scores (Exhibit 1). The two largest brands in the chain from a system sales perspective are Mikes (~$100M system sales) and Scores (~$105M system sales). Exhibit 1: Overview of Imvescor Brands f2014 f2015 Year Number of System Est Percent Royalty Geographic Location Breakdown Brand (1) Founded Units Sales (000) AUV (2) Franchised