Pat McKeough recently replied to an Inner Circlemember looking for an opinion on Imvescor Restaurant Group Inc. The company’s focus on its menu and customer service has boosted sales for its restaurants as well as its earnings.
Q: Hello Pat: What would be your opinion of Imvescor Restaurant Group Inc.? Thank you very much.
A: IMVESCOR RESTAURANT GROUP INC. (symbol IRG on Toronto; www.imvescor.ca) operates 223 restaurants (218 franchised and five company-owned) under the Pizza Delight, Trattoria di Mikes, Scores, and Baton Rouge brands. They are mainly in Atlantic Canada.
The company’s revenue rose 6.6%, from $44.4 million in 2011 to $47.3 million in 2012 (fiscal years end October 31). Revenue then dipped to $44.8 million in 2013, but recovered to $46.6 million in 2014. Imvescor closed some underperforming outlets in 2015, which is why its revenue for that year fell to $44.5 million.
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Earnings fell 46.0%, from $3.1 million in 2011 to $1.7 million in 2012. That was due to a loss on the early redemption of debentures (unsecured loan certificates that Imvescor issued). The company also issued shares as part of a refinancing plan; with more shares outstanding, earnings per share fell 85.7%, from $0.29 to $0.04.
Imvescor’s earnings then rose to $0.05 a share (or $2.6 million) in 2013, and reached $0.19 a share (or $10.1 million) in 2015.
In the three months ended July 31, 2016, revenue gained 18.7%, to $13.1 million from $11.0 million a year earlier. Same-restaurant sales improved 1.2%. Earnings in the quarter jumped 24.5%, to $0.05 a share (or a total of $3.1 million) from $0.04 a share (or $2.5 million).
These gains are mainly due to Imvescor’s three-year strategic plan to spur its growth. Launched in early 2015, that plan includes: a reduction in the number of menu items to focus on improving the quality of the food; a strategy to improve customer service; and the renovation of its restaurants. By the end of this year, the company and its franchisees expect to have completed renovations on a total of 45 restaurants.
Penny Stocks: Long-term debt just 1% of market cap
As of July 31, 2016, Imvescor held cash of $484,000, and its long-term debt of $1.9 million was a low 1% of its market cap.
The thinly traded stock has gained 30% in the last six months. That’s largely because two long-time shareholders want management to sell the company. Together these two activist investors—hedge funds ADW Capital Partners and Camac Partners—own 16.4% of Imvescor. The list of possible buyers for the company include Cara Operations, Fairfax Financial and MTY Food Group. Former Imvescor shareholder Crescendo Partners—another activist investor—tried to find a buyer for the company in 2014, but was unsuccessful.
The stock trades at 16.2 times the $0.20 a share that Imvescor likely earned in fiscal 2016. The stock could drop if a deal to sell the company fails to materialize. However, Imvesco has improved its balance sheet as well as its sales and earnings, despite its highly competitive market. That makes finding a buyer more likely. The $0.0225 quarterly dividend yields 2.8%.
Inner Circle recommendation: Imvescor is okay to hold, but only for aggressive investors.
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