Tris Rating rates Mudman PLC (MM) a BBB-, reflecting the company's well-recognised brands and market position in the quick service restaurant (QSR) and chain restaurant segments, but taking into consideration MM's weak profitability, earnings growth pressure from intense competition and looming capital expenditures from domestic and overseas expansion.
MM's QSR and restaurant brands are all well-known in Thailand. The company operates three franchised QSR brands -- Dunkin' Donuts, Au Bon Pain and Baskin-Robbins -- as well as its own full-service restaurants under the Greyhound Cafe (GHC) and Anotherhound Cafe brands. In addition, the company engages in fashion and lifestyle businesses under the Greyhound brand.
MM's market position is defined by its moderate market coverage. As of December 2017, MM had 420 food outlets in Thailand. Of all brands in MM's portfolio, Dunkin' Donuts has the broadest network of branches with 293 stores nationwide. On the other hand, 74 Au Bon Pain stores, 36 Baskin-Robbins stores and 17 GHC stores are mainly located in Bangkok and surrounding areas, where customers have relatively high spending power.
In 2017, MM registered revenue of 2.83 billion baht and earnings before interest, tax, depreciation and amortisation (ebitda) of 238 million baht, with an ebitda margin of 8.4%. The company's revenue base is relatively small, and profitability is low compared with peers.
Despite an increase in the number of outlets in 2017, revenue dropped 2% year-on-year. Overall traffic in food stores dropped and same-store sales fell by 2.7% in 2017. The drop was due to the slow economic recovery and intense competition among food and drink operators, as the QSR and restaurant industries are fragmented and subject to risk from new entrants because of the low initial capital requirement.
Among all brands in MM's portfolio, GHC performed the best. It posted 844 million baht in revenue in 2017, an increase of 20% from last year, driven by 8% same-store sales growth and the addition of more branches. GHC recorded satisfactory profitability with a 14% ebitda margin.
Baskin-Robbins showed slight improvement as sales rose 2% and ebitda turned positive in 2017. On the other hand, Dunkin' Donuts and Au Bon Pain registered weaker sales as competition intensified.
GHC expanded restaurants into many overseas markets using the franchise model. As of 2017, there were 17 franchised branches overseas, including eight branches in Hong Kong, five in Mainland China, two in Malaysia, one in Singapore and one in Indonesia. The expansion through franchises requires few additional costs, while providing MM upfront fees and recurring royalty fees that enhance profitability. But expansion under the franchise model poses a challenge regarding branch quality control.
Apart from growth via the franchise model, in late 2017 GHC opened its first owned restaurant outside Thailand. The 192-seat GHC restaurant, located in London, is well received among Thai expats and locals. The company plans to open more branches in London and other cities in Europe under its own investment rather than through the franchise model.
In addition to GHC's overseas expansion, the company in December 2017 acquired a 100% stake worth about 360 million baht in a historic restaurant in Paris, Le Grand Vefour, from French celebrity chef Guy Martin. Le Grand Vefour is a well-known Michelin two-star fine dining restaurant and is regarded as a historical treasure, having been in operation for more than 230 years.
The company believes that having an international presence in the restaurant business through this acquisition, along with the collaboration with renowned chef Mr Martin, will help further expansion into European and international markets. Continued success from overseas expansion remains to be seen.
After being listed on the Market for Alternative Investment (MAI) in April 2017, MM received cash from the IPO of about 1.1 billion baht. Most of the proceeds were used for repaying debt, and the remainder was for outlet expansion.
As a result, the company's capital structure improved with an adjusted debt-to-capitalisation ratio of 32% in the first quarter of 2018, down from 49% in 2016. The company's liquidity was acceptable, with a ratio of adjusted funds from operations (FFO) to total debt of 33% and adjusted ebitda interest coverage of seven times in the first quarter of 2018.
Going forward, Tris Rating expects MM to have capital expenditure of 300-400 million baht a year during 2018-20. The capital spending will fund the expansion of QSR and restaurant branches and maintenance of existing branches.
Tris Rating expects the company's adjusted debt-to-capitalisation ratio to sit in a range of 35-40% during 2018-20. Tris Rating's base-case scenario assumes average annual revenue growth of 9%, contributed mainly by branch expansion and the consolidation of GHC in London and Le Grand Vefour restaurant in Paris.
Selling, general and administrative expense efficiency is expected to improve as economies of scale are gained by the increasing number of branches. The debt-to-capitalisation ratio is forecast at 35-40%. FFO will range from 220 million to 280 million baht a year during 2018-20, with the ratio of adjusted FFO to total debt between 28% and 30%.
The stable outlook reflects expectations that MM can maintain its market position and gradually improve operating performance in domestic and overseas markets.
A rating upgrade would occur if the company's operating performance improved substantially for a sustained period while maintaining sound financial leverage. A rating downgrade, on the other hand, would come from weaker-than-expected operating performance for a prolonged period of time or overly aggressive debt-funded investments.
MM was founded in 2006 and listed on the MAI on April 11, 2017. As of December 2017, Sub Sri Thai, a warehouse and document storage provider, was the major shareholder, owning 64.3% of MM's paid-up shares.
