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 (via a comment in the previous post) 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”.

The two key assumptions queried by BurgerFuel were:

• Revenue in year 5 from franchise setup fees.
• Growth in average sales per store.

In the original post Valuecruncher did not explicitly account for the revenues from franchise setup fees, we stated approximately 700 stores would be required to generate the $76.6 million expected in year 5 (based on our analysis). At $1 million sales per store 700 stores was a conservative approximation that incorporated an allowance for franchise setup fees. It is difficult to estimate the the setup fee figure because you don’t know how many franchises will be sold to franchisees in that year.

Valuecruncher assumed that average store sales were $1 million (based on information contained in the prospectus). BurgerFuel raise the valid point that this number could increase over time and suggest an 8% pa growth rate. Although the prospectus contains historic store numbers and system sales they have not included a historic same store sales growth figure, this information would be useful to any investor evaluating the opportunity and Valuecruncher can see no reason why it wasn’t included. The average store sales of $1 million dollars reflects the performance of the current NZ operations, we have no idea what level of sales will be achieved in other markets (Lance Wiggs provides an overview of the competitive landscape) or what level of sales stores will experience as they open but find it hard to justify an abitrary assumption of 8% pa growth. 

Based on the revised assumptions provided by BurgerFuel the 5-year target drops from Valuecruncher’s figure 700 stores to 350 stores (350 stores represents opening an average of 1.3 stores per week every week for the next 5 years). Valuecruncher stands by the original assumptions used but the response highlights the uncertainty involved and how sensitive the analysis is to your assumptions. 

The return generated by an investment is a function of the price paid and Valuecruncher believes the current valuation does not reflect the risk and uncertainty associated with the BurgerFuel opportunity. BurgerFuel and their advisors should have conducted detailed analysis of the opportunity when determining the IPO price, it would have been nice if they could have shared some of their assumptions and expectations with potential investors in the prospectus.

This entry was posted on Thursday, July 5th, 2007 at 4:00 pm and is filed under Burger Fuel. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.