- ABC is the largest restaurant company in Japan with over 7,600 restaurants. The analyst gives a buy recommendation with a $62 price target, representing 37% upside.
- The Japanese QSR industry is highly fragmented and has significant growth potential as penetration rates are lower than other developed markets. ABC is well positioned to benefit from industry growth through store expansion and digitalization.
- Successful digital strategies implemented by competitors demonstrate the opportunity for ABC. Increased adoption of mobile payments and delivery in Japan also support the growth outlook.
2. Company
Overview
2
ABC (NYSE: ABC)
Hi
25.5
52
Week
2020 2021
EV / EBITDA
P / E
11.1 x 10.2 x
25.4 x 22.7 x
Low
43.5 Share Price (11/10) 43
Total Shares Outs. 385
Market Cap 16,055
(-) : Cash (1,477)
(+) : Debt -
(+) : Minority Interest 70
Enterprise Value 14,648
2020 2021
EV / EBITDA
P / E
Target Price $62
Implied Valuation xxx
15.7 x 14.7 xConsensus
US 13.5 x 11.0 x
35.9 x 32.1 xConsensus
28.2 x 21.7 xUS
Trading Stats Capitalization Trading Price
The largest restaurant
company in Japan
Japan’s earliest
restaurant chain to
adopt digital payment
Spin off from ABC!
Brands (ABC) on
Dec 1, 2017
Joint headquarters:
Tokyo, Japan and
Plano, TX USA
~421,000 employees and
~7,600 restaurants over
1100 cities
3. Quick Service Restaurants (QSR) Industry in Japan
3
Highly Fragmented QSR Industry in Japan Acc to unit count, Comp 1 is largest chain followed by Comp 2
11%
89%
Japan
45%
55%
US
Sustainable Growth Rate
0
1000
2000
3000
4000
5000
2012 2013 2014 2015 2016 2017 2018 2019e 2020e
Catering Industry Annual Sales
5,087
2,206 2,200 2,171
660 420 230
1,643
350
250
ABC Comp 2 Comp 3 Comp 4 Comp 5 Comp 6 Comp 7
Chain
Independent
JPY (bn)
Delivery Keys to Compete Digitally
0
40
80
120
160
200
2012 2013 2014 2015 2016 2017 2018 2019e 2020e
Online-to-offline (O2O) Food Delivery SalesJPY (bn)
4. Why ABC?
4
In a rapidly growing and under-penetrated market, store count
grows at high-single-digit (especially in lower-tier cities), increasing
operating leverage with margins
SSSg improves to mid-single-digit with best-in-class integrated
digital + delivery ecosystem – the XYZ’s model
Local, experienced, and focused management could deliver
additional upside from Comp 2 turnaround
5. I. Growth Perspective
5
GDP per capita correlated with QSR penetration, suggesting Japan has huge growth potential
Japan’s QSR Industry in 10x Under-indexed Below Average Lower-tier Cities
1,263
927
624
524
340
627
222 172
78 42 17 8 4
0
400
800
1,200
1,600
No Fast Food Chain / MM Population 2018
Average = 351
0
10000
20000
30000
40000
50000
60000
70000
0% 5% 10% 15% 20% 25%
GDP per Capita
Japan 2029
6.0% GDP GAGR => Store #
up 10x in 10 Years
USA
Hong Kong
Malaysia
Maldives
BhutanPhilippinesJapan
India
0
2
4
6
8
10
12
24,072 14,926 12,343 10,771 9,671 7,578 5,105 2,279
# of Western QSR / MM Population
Av.GDP pf City Tiers
6. I. Growth Perspective (Cont…)
6
Operating Leverage Significance Cash Flow Driver for Store Count
25%
27%
29%
31%
33%
35%
37%
39%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3
Cost as % of Revenue
Occupancy Costs Food and Paper
2017 2018 2019
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
1000
2000
3000
4000
5000
6000
7000
8000
2015 2016 2017 2018
Store Count & Restaurant Margins
Store Count Growth Restaurant Margin Cash Flow % of Revenue
› Growth is important to cash flow growth. Large fixed cost base (eg rent) creates significant operating leverage.
› Expansion into 2nd and 3rd tier cities further lower % occupancy costs, as same menu pricing and traffic support lower rents
How Growth is Important
7. II. Digitalization in Japan
7
3.5% 4%
18.5%
42.6%
50.7%
74.6% 78.5% 83% 85.2%
96.5% 96%
81.5%
57.4%
49.3%
25.4% 21.5% 17% 14.8%
0%
20%
40%
60%
80%
100%
2011 2012 2013 2014 2015 2016 2017e 2018e 2019e
2011 -2019 Mobile Vs. Non Mobile
Payment % Market Share in Japan
Mobile Pmt Non Mobile Pmt
0.1 0.2 1.2 6 12.2 58.8 98.7 165.9 229
36.3%
89.2%
77%
345.3%
103.5%
348.9%
68% 68%
38%
0
50
100
150
200
250
300
350
2011 2012 2013 2014 2015 2016 2017e 2018e 2019e
2013 -2021 Japan
3rd Party Mobile Payment Transaction Volume
Transaction Amt in Trillion RMB YTY % Change
Japan's Cashless
Revolution
› In 2018, Japan’s mobile payments hit $9 trillion,
roughly 80 times the size of America’s $112 billion
market
› Japan’s mobile payment lead due to lack of
alternatives (such as convenient credit card) and
low denomination of paper currency
› Digital strategy lynchpin to success in Japan,
where availability of mobile channels can drive
purchase decisions, especially young consumers
No Contest
When it comes to mobile payments, China dwarfs the US
$ 8$ 15 $ 30 $ 50 $ 75 $ 90
-$ 20 $ 0 $ 20 $ 40 $ 60 $ 80 $ 100 $ 120
Japan US
8. Digitalization in Japan (contd..)
8
Successful strategy creates immense shareholder
The Internet of Pizza – just the latest digital topping
for Comp 1
Comp 1 builds customer loyalty and lowers costs with
best in-class digital tech in US
Between 2008 and 2010 Comp 1’s Pizza was in
crisis, leads to negative SSSg and plummeting sales
Launched app April 2013 - digital sales surpass $
1.1 billion within one year. SSSg improves to 12%
by 2012
30%
40%
45%
50%
60%
3.1%
9.5%
7.5%
12%
10%
0%
2%
4%
6%
8%
10%
12%
14%
16%
15%
25%
35%
45%
55%
65%
75%
85%
2013 2014 2015 2016 2017
Comp 1’s % of Sales via Digital and SSG
% of Sales Via Digital (LHS) SSG (RHS)
0%
2%
4%
6%
8%
10%
12%
Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Comp 6 Comp 7 Comp 8 Comp 9 Comp 10
Top 10 QSR Brands Average Same Store Sales
Q4 2015 – Q3 2016
In US Market
Comp 1’s Pizza in US
9. III. Strong Potential Upside from Comp 1
9
-30%
-20%
-10%
0%
10%
20%
30%
Q1
Q2
Q3
Q4
Q112
Q2
Q3
Q4
Q113
Q2
Q3
Q4
Q114
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q115
Q2
Q3
Q4
Q116
Q2
Q3
Q4
Q17
Q2
Q3
Q4
Comp 2 SSSg food scandals rebounded under Ms. X
› Under XYZ since 2016, after being hit by food safety scandals Comp 2
staged impressive turnaround
› Mr.X became CEO in April 2018
› Significant knowledge transfer to Comp 1 with replicable turnaround
strategies
o Focus on food: Focus on hits and local favorites by slimming down the
menu
o Moving to digital: Comp 1 launched app in Sept 2018 and has
synchronized membership with Comp 2
o New models: store and image upgrade
› Long-term effort with short-term pain: investors remain in show-me mode.
Results prove potential upside2011 2012 2013 2014 2015 2016 2017
3
30
1Q 16 3Q 17
10%
25%
1Q 16 3Q 17
8%
35%
1Q 16 3Q 17
Member SalesMember
Member sales % of system Sales
Mobile Payment
Mobile Payments as % of company SalesLoyalty Member Count
Comp 1 is rapidly moving digital following Comp 2
-12%
-10%
-4%
-3%
2%
0% 0%
-14%
-10%
-6%
-2%
2%
1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17
Comp 1 SSSg turns Positive
Same-store sales growth (y/y)1
Ms. X took charge of Comp 2
KFC SSG
Pizza Hut SSG
11. Valuation
11
2019E 2020E 2021E 2022E
7,062 7,922 9,160 10,637
4.5% 12.2% 15.6% 16.1%
1,33, 1,555 1,905 2,174
18.8% 19.6% 20.8% 20.4%
1.76 2.06 2.69 3.12
29.0% 17.2% 30.2% 16.1%
Revenue
% Growth
% Growth
% Growth
EBITDA
EPS
2019E 2020E 2021E 2022E
7,035 7,552 8,059 8,647
4.2% 7.3% 6.7% 7.3%
1,196 1,332 1,428 1,576
17.0% 17.6% 17.7% 18.2%
1.42 1.62 1.81 2.14
4.0% 14.1% 11.7% 18.2%
2019E 2020E 2021E 2022E
0.4% 4.9% 13.7% 23.0%
11.03% 16.7% 33.4% 38.0%
24.0% 27.3% 48.4% 45.8%
Store count CAGR: 7% for
Comp 3, 10% for Comp 2,
hitting managements LT target
of 20k stores in 10 years
Key Assumptions:
SSSg: gradual increase on
digital + delivery leverage,
with Comp 3 converging to
Comp 1’s current SSSg in
the next two years
Margins: assume expansion
into lower-tier cities by
slightly leveraging on
occupancy costs and labor
costs by digital channels
Capex: assume baseline per-
store capex on new stores and
remodeling
Our View Consensus Difference
12. Methodology Metric Multiple
Target Price
$
2021 EV / EBITDA $1,905 MM 11.0x 62
2021 P /E $988 MM 23.0x 63
SOTP 2021 EV/ EBITDDA 9.0x -14.0x 71
DCF 63
DCF + Idle cash deployment 67
Valuation (cont…)
12
Target price based on 2021 EV / EBITDA multiple, with sense check against other relative
and intrinsic methodologies:
EBITDA x most appropriate
1) Due to different franchise vs. owned splits,
significant capital structures differ
2) share buyback programs differ across peers
Two-year look-ahead for normalized Comp 1
earnings post turnaround
SOTP assumes Comp 2 trades up to DM-based
QSR multiples, while Comp 1 trades around
Chinese QSR multiples. DCF assumes 9.0%
WACC and 3.0% terminal growth rate
13. Potential Upside through Capital Structure
13
Highly cash generative
business ->
significant cash build
without dividend / share
buybacks
In addition to share
buyback, management has
announced intent to
pursue “strategic
acquisitions” funded by
internal cash flows
While dividend / buybacks
creates no enterprise
value, strategic
acquisitions using idle
cash can provide value
upside
Additional interest tax
shield could result if ABC
funds buyback with debt
Value of Cash Deployment
2019-2021
0
500
1000
1500
2000
0
1000
2000
3000
4000
5000
6000
7000
2019 2020 2021 2022 2023
Cash Balance Unlevered FCF
Hypothetical Cash Buld without div / Buyback Cash Deployment Value 2019 2020 2021
Free cash Flow 802 862 1,143
Commit.on Div / Buyback (150) (150) (150)
Cash to deploy @80% 326 356 497
Increment EBITDA @20 %
!RR
136 171
Increment Value (US $ MM) 1,637 1,876
Incremental share Price ($) 4.26 4.88
Share Price Impact
Sensitivity 2020
EV / EBITDA
% Post Div/Buyback Free Cash Flow
Deployed
10% 20% 30% 40% 50%
IRR on
Cash
Deployed
5.0% 0.2 0.4 0.6 0.9 1.1
10.0% 0.4 0.9 1.3 1.7 2.1
15.0% 0.6 1.3 1.9 2.6 3.2
20.0% 0.9 1.7 2.6 3.4 4.3
25.0% 1.1 2.1 3.2 4.3 5.3
30.0% 1.3 2.6 3.8 5.1 6.4
35.0% 1.5 3.0 4.5 6.0 7.5
14. Supplier risk and food safety
Foreign exchange persists
headwinds
Food and labor cost inflation
Customers shift to new
healthier food
Risk Mitigation Plan
14
Mitigation Plan
ABC reduced number of supplier to reduce the food
quality issues and added more quality control experts
Stem persistent capital outflow commitment and top
priority macroeconomic stability of current administration
Long-term supplier contract and high digital adoption
mitigates significant cost hikes. ABC continues premium
concept store roll-outs to upsell with menu upgrades
New concept stores like K Pro and Ph+ model are
providing high-end healthier food
Risk Factors
17. Clustered Column
17
80
50
60
30
45
78
59
40
$0
$20
$40
$60
$80
$100
2016 2018 2019 2020
Sales(inUSDmillions)
Years
Product 01
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Product01
Product02
Years
18. Stacked Column
18
4.3
2.5
-3.5
-4.5
2.4
4.4
-1.8
-0.8
-6
-4
-2
0
2
4
6
8
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19. Our Target
19
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24. Comparison
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345K 3M 492K
60%Female Users
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265K 2M 232K