In Brief: Collins Food, Domino’s, Guzman y Gomez & Artrya

This story features GUZMAN Y GOMEZ LIMITED, and other companies. For more info SHARE ANALYSIS: GYG

What’s brewing in the quick service sector; cardiac CT diagnosis company, Artrya gets an AI boost; will special dividends make a comeback?

-Is the macro tide turning for quick service restaurants?
-Gen.Ai to the cardiac CT scan rescue
-Franking credits take a different dividend shape 

By Danielle Ecuyer

Quote of the week comes from Michael Howell, founder and managing director of CrossBorder Capital, whom I interviewed on September 25.

“The idea of the US defaulting is fanciful. I mean, that’s just nonsense. It’s incapable of doing that because we all use dollars. The whole international financial system uses dollars. America can always pay its debts by printing money.”

Video and transcript links near the bottom of today’s story.

Are quick service restaurants coming back into flavour?

Star IPO of 2024, Guzman y Gomez ((GYG)) might have done its taco dash according to Goldman Sachs, with the broker shining a light on the status of quick service restaurant business models and their macro-economic backdrop in Australia.

After a post-covid period of constrained discretionary spending and higher food/labour costs, the broker suggests quick service restaurant businesses are ready to turn the corner.

Boosted by expectations of declining interest rates and recent tax cuts, consumer sentiment is “trending positively” with scope for an increase in real disposable income and consumption on the cards.

When combined with slowing inflation, improved supply chains and easing costs, Goldman Sachs sees scope for both revenue growth and margin improvements for the QSR sector.

Jarden has joined the quick-service restaurant bandwagon taking a global approach to changing fortunes for the industry. Jarden analysts see an improvement in the cost of goods sold, plus some consolidation in the sector with earnings cycling a period of highly competitive price promotions.

While the analysis suggests revenue growth has yet to re-emerge, the backdrop is one of a more cost-conscious consumer who will preference quick service over full-service restaurants, as well as pick up against delivery.

Larger chain operators with more buying power hold a competitive advantage over smaller businesses that lack the scale and investing dollars for technology.

Across the geographies Jarden has picked up Japan is showing the most upbeat signs, A&NZ is plateauing, and Europe has put the worst behind it.

Jarden has a Buy-equivalent rating on Domino’s Pizza Enterprises ((DMP)), target price $42; as well as for Collins Food ((CKF)), target price $9.57, with the former the preferred exposure. 

Goldman Sachs cannot justify the premium valuation for Guzman y Gomez which has aligned with quality US peers, although the composition of the domestics versus US markets bears no resemblance. This analyst is also wary about the ability to exceed the FY25 prospectus forecasts while the store expansion plans have no “recent successful precedent”.

There is also around a 13% stock overhang with escrow shares available for release in March 2025 and another circa 40% in August 2025. 

Guzman y Gomez cops a Sell rating and $33.20 target price.

In contrast, Collins Food is Buy rated on the back of abating headwinds of the last few years which led to earnings and margin downgrades with a “moderation” in cost growth across wages, poultry, electricity, rent, and declines in grain/oil prices to pre-covid levels.

A pickup in discretionary spending across the company’s major states, Queensland and Western Australia; an improved digital presence and a scaling of the operations in the Netherlands, with better European margins, are all viewed by Goldman Sachs as positive trends.

Collins Food has a target price of $10. 

A heart stopping stock

Petra Capital enters the healthcare Gen. Ai fold with an initiation of coverage on Artrya ((AYA)) which is exposed to an estimated $5.4bn total addressable market in cardiac CT diagnosis across Australia and the US.

The company’s Salix product is described as “next gen deep learning solution” to imaging analysis for cardiac CTs.

Increasing demands on radiologists and growing demand for more timely responses are seen providing a favourable market backdrop for the Salix offering.

The broker highlights full automation with a reduction in human intervention can help lower the delivery time for results to around 15 minutes from over two hours to 24 hours.

While the company had some delays with FDA approval in 2022, Petra believes under new management Artrya will receive approval in 1Q2025 for the first Salix Coronary Anatomy product.

The company has reached commercialisation stage in Australia with revenue generation anticipated in 1Q25 and US revenues post FDA in 2H2025. The broker forecasts risk-adjusted revenue growth of 90% per annum over the following five years, achieving $124m by 2030.

US markets are believed to hold the most upside potential with sales to reach a forecast $347m in 2034, with an estimated gross margin of 86% and EBITDA margin over 70%. As a SaaS based model, these margins are viewed as probable, allowing Artrya to be earnings positive in 2027.

Petra’s target price stands at $2.21 with a Buy rating. The stock currently has a circa $21.6m market cap which compares to its direct competitors, HeartFlow, Cleerly and Elucid which are privately owned with forecast valuations between US$320m to over US$2bn.

Let’s speak frankly

Changes to rules around distribution of franking credits in 2023 put a stop to the popular, often large, off-market buybacks which were the not so trojan horse for distributing a company’s excess franking credits.

Morgan Stanley proposes Australian companies with excess franking credits may look to special dividends as an alternative, especially when on-market buybacks are less appealing to domestic shareholders when valuations are more elevated, thereby creating a longer payback.

Capital management could shift back into a favourable position for Australian investors should domestic companies decide to distribute excess credits via a special dividend.

The broker suggests this could also alter the valuations for the companies, as increased franking credits can boost post tax shareholder returns.

Morgan Stanley’s compilation of the who’s who of excess franking credits relative to the last dividend paid is as follows, ranked from highest to lowest as:

-BHP Group ((BHP))
-Rio Tinto ((RIO))
-Fortescue ((FMG))
-Westpac ((WBC))
-Woodside Energy ((WDS))
-Commonwealth Bank ((CBA))
-Woolworths Group ((WOW))
-Whitehaven Coal ((WHC))
-South32 ((S32))
-Endeavour Group ((EDV))
-Reece ((REH))
-Ramsay Health Care ((RHC))
-Wesfarmers ((WES))
-REA Group ((REA))
-Pilbara Minerals ((PLS))
-New Hope Corp ((NHC))
-Origin Energy ((ORG))
-Mineral Resources ((MIN))
-IGO Ltd ((IGO))
-National Australia Bank ((NAB))
-Bendigo and Adelaide Bank ((BEN))
-Iluka Resources ((ILU))
-Beach Energy ((BPT))
-a2 Milk ((A2M))
-JB Hi-Fi ((JBH))
-Harvey Norman ((HVN))
-Eagers Automotive ((APE))
-Coles Group ((COL))
-Ampol ((ALD)).

By way of interest the ASX200 dividend payout ratio has been trending down from a peak of over 75% in 2016 to just under 65% currently. The sectors with the highest percentage of earnings returned to shareholders via dividends are Communication Services and Utilities at 95%, Industrials 76%, Staples 75%, Financials 74%, Discretionary 66%, Real Estate 62%, Energy 59%, Materials 51%, Technology 48% and Healthcare 47%.

Lots of food for thought in those percentages when assessed against which companies invest heavily in R&D and growth, versus the more stable earnings streams from a Telstra, AGL or Woolworths. Or are they? 

For more reading and viewing on Michael Howell:

https://fnarena.com/index.php/2024/10/03/interview-with-michael-howell-crossborder-capital/

https://fnarena.com/index.php/fnarena-talks/2024/09/27/fnarena-talks-with-crossborder-capitals-michael-howe-about-global-liquidity-driving-gold-and-financial-assets/

https://www.youtube.com/watch?v=KsCf0E0m8OU

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