Burger Fuel IPO - Would you like shares with that? No!
New Zealand gourmet burger chain Burger Fuel has announced it’s intention to list on the NZAX. The IPO is to raise $15 million at $1.00 per share and values the company at $60 million. According to the Burger Fuel Prospectus proceeds of the IPO will be used to fund expansion into the Australian market. The expansion will involve Burger Fuel setting up and operating restaurants before on selling them to franchisees. Burger Fuel currently has 19 stores in New Zealand and 1 in Australia.
Burger Fuel is a growth company that has potential to expand both within New Zealand and overseas but a valuation today of $60 million is crazy. The absence of any projections (operating or financial) and detailed financials in the prospectus makes it difficult to value the company. Valuecruncher has conducted some high-level analysis of the $60 million valuation implied by the IPO issue price. The analysis draws on information contained in the Burger Fuel prospectus and operating and valuation data associated with Burger King.
Assumptions
Valuation Today: $60 million (Based on IPO issue price)
Cost of Capital: 20% (Based on risks associated with investment)
EV/EBITDA Valuation Multiple: 13 (Based on established burger chain Burger King)
EBITDA Margin: 15% (Based on established burger chain Burger King)
Burger Fuel Royalty: 10% of total system sales (6% revenue royalty + 4% marketing levy)
Average Sales per Store: $1 million per annum (Based on information contained in the prospectus)
Horizon: 5 years
Dilution: Any future capital raising would not dilute the value of shares issued in IPO.
Based on these assumptions Burger Fuel’s $60 million valuation today implies expected revenues of $76.6 million in 5 years, based on 100% of the stores being franchisee owned and revenue + marketing royalties of 10% this equates to approximately 700 stores and approximately $700 million of total system sales. Burger Fuel currently has 20 stores and had $16.5 million of total system sales in the 2007 financial year. These assumptions are very subjective but highlight the magnitude of growth implied by the $60 million IPO valuation.
Valuecruncher believes that based on the high-level analysis, current status of Burger Fuel’s operations and the extremely competitive nature of the market the IPO valuation cannot be justified and question why Burger Fuel is undertaking an IPO at this stage. These issues are compounded by no substantial explanation of how the funds from the IPO will be used and the absence of any financial projections in the prospectus.
June 26th, 2007 at 8:56 am
[...] I’m not saying that BF can’t do what they say they will. However, I am extremely sceptical of the likelihood of them doing so, and I won’t be investing. I’m not the only one. Have a look at Mark Clare’s analysis. [...]
June 27th, 2007 at 1:29 am
Spot on Mark
June 27th, 2007 at 3:06 am
[...] BurgerFuel: value or not? Published June 27th, 2007 NZ Business , Investing Mark Clare just says No! to the BurgerFuel prospectus. A valuation that implies BF will grow from opening 20 stores from 1997 to now, to 700 in five years is something that he just can’t accept as realistic. I agree - even Subway, the world’s biggest franchise, only has 1200 stores in Australia and NZ, while more realistically Burger King has 380. [...]
June 27th, 2007 at 3:06 am
[...] BurgerFuel: value or not? Published June 27th, 2007 NZ Business , Investing Mark Clare just says No! to the BurgerFuel prospectus. A valuation that implies BF will grow from opening 20 stores from 1997 to now, to 700 in five years is something that he just can’t accept as realistic. I agree - even Subway, the world’s biggest franchise, only has 1200 stores in Australia and NZ, while more realistically Burger King has 380. [...]
July 5th, 2007 at 10:58 am
Dear Valuecruncher,
Thanks for taking a look at the BurgerFuel IPO and publishing your analysis for your clients, readers and the general web community to consider. We’ve taken a look at your high-level analysis with a lot of interest and appreciate that our decision to not post projections and other prospective information has no doubt made this a lot more difficult for the team at Valuecruncher.
However, we would like you to consider a few things that have been overlooked in your valuation.
Your calculation only takes into account ongoing franchise revenue over the system. There are a number of other income streams that are not included in the Valuecruncher analysis, for example, Burger Fuel Worldwide Limited (BFW) also receives upfront franchise fees for each store that it sells - $65,000 (refer page 54 of the prospectus for more info) – you will see that on the 700 stores Valuecruncher refers to, that BFW would receive additional income of $45.5 million in upfront franchise fees.
This needs to be spread as income over the years Valuecruncher has assessed BFW will take to build these stores (you’ve said 5 years). This adds a further $9.1M per annum in revenue (if we keep it simple and just divide by 5).
Based on your 5 year projection, in year 5 the company would have revenue of $70million, but you have to add the upfront fees of $9.1 million (received in that year) to give $79.1 million, from there you obviously still have to assess the company overheads as we are not providing prospective financials. However, it is important to keep in mind that the NZ HQ and infrastructure is already well established and that BurgerFuel has been supporting an Australian HQ and infrastructure in preparation for expansion.
In addition, Valuecruncher has made no allowance for any potential growth in the per store average turnover. If you look at our average over the last 3 years (refer page 53 of the prospectus) you will see that as well as increasing store numbers our per store average (PSA) is also increasing. As the brand gets bigger its logical to assume that store turnovers may continue to rise (growth is also supported by ever increasing marketing budgets). This store growth also needs to be factored into any value equation.
Per store turnover reported in the prospectus to 31 March 07 was $20,727 per week or $1,077,804 per annum. For example if the PSA average grows at 8% per annum (we are not saying it will –but inflation alone will account for part of this) that would put the yearly per store turnover in 5 years at $1,583,647. If the ongoing franchise fees remain the same as the current – 10% (and they could also increase over that 5 year period) the ongoing franchise revenue alone would be around $110 million (instead of the $70 million in your valuation). This does not include the up-front fees mentioned above, which we calculated above to be at $9.1 million per annum, which would make it $119.1 million instead of your assessment of $70 million.
In fact, you will find that the figures are closer to the $76.6 million referred to in your model, at half the stores you have eluded to – 350 stores providing $22.75 million in up-front fees over 5 years (average of $4.55 million per year) along with ongoing revenues of over $55 million per year (350 stores at $1,583,647 x 10%). Under this model the revenue in the 5th year would be around $60 million with just 350 stores.
For the record, we are only responding to your scenarios and analysis to ensure that you have the correct understanding of our business model. However, you should note that our responses do not constitute prospective or forecast financial information.
We hope this helps you guys in any further valuations, assessments or discussions you may be undertaking with clients or others. If you have any other questions or would like any other items clarified please feel free to call or email us.
Thanks again for ‘Valuecrunching’ the BurgerFuel IPO,
The Team at BurgerFuel
http://www.burgerfuel.com/shares
July 5th, 2007 at 4:07 pm
[...] Last week Valuecruncher commented on the BurgerFuel IPO. The post focused on the post IPO valuation of $60 million and carried out some high-level and subjective analysis of what that valuation implied in terms of BurgerFuel stores in 5 years. This analysis was restricted by the limited information provided in the prospectus. The BurgerFuel Team has responded to the analysis and highlighted alternative assumptions for a couple of the key variables in our analysis. Valuecruncher is surprised that BurgerFuel are commenting during the IPO process and would like to reiterate BurgerFuel’s point that “responses do not constitute prospective or forecast financial information”. [...]