RFG – Retail Food Group

it’s hard to predict price movement of a share price, and there are always some risk when buying stocks so I’m not too hang up on it.

What I look for is room for expansion, room for earning increase and room to increase dividend payout and trades at a price I’m willing to pay

the rest I let the market sort itself out over 5-10 years period.

After seeing a presentation by Lincoln Intellegent MArket Solutions, I will apply their 8 golden rules to RFG. I have not yet applied these rules to RFG, but it is currently one of my favourite shares.

1. Financial Health
Cash Flow (operating activities): ~$13m per half
Borrowings Repayments: Paying off ~$5m per half
Dividends: ~$6m per half
Debt: $67.7m debt and falling. Gearing 31.1%.
Overall they have strong cashflow and any excess cash is split between investments, paying off debt and dividends. Good.

2. Management Assessment
ROA: Google Finance shows this as 11% for 2010.
EPS: 8.6c in FY06, 25.5c in FY10, 1H11 was a record EPS. Google Finance shows this as 21% for 2010.
Both seems strong.

3. Share Price Value
Commsec shows a PE of 9.2 versus a sector average of 12.8 PE.
The broker target from before the OAK bid was $3.45.
The broker target after the OAK bid is $2.60.
Since the OAK bid is cancelled I will consider the original target.
The current SP of $2.43 is below the target of $3.45. The target is 42% above the current SP.

4. Liquidity
The spread is $2.35 BUY order, $2.43 SELL offer. A fairly big spread.
The daily volume is low, less than 20,000 shares traded on an average day.
Lincoln would recommend a holding of $10,000 or less based on the volume alone (20% of the daily turnover). Mine is quite above $10k though.

5. Share Price Trend
A good 5 year trend, a bad 1 year trend.
To me though, the SP movement from the OAK bid was not a trend but a one time movement. Ignoring this movement will leave a positive trend.

6. Market Cap
$262m Market Cap, a fair size for investing in.

7. Company Activities
Retail food brand manager and franchisor
Donut King, Michel’s Patisserie, Brumby’s Bakeries, Esquires Coffee Houses and bb’s cafe.
Donuts in my opinion may go bankrupt in the long term, because of healthy Australians. I expect RFG to overcome it though. The other sectors seem fine.
Could be affected by a fall in consumer spending.

8. News
Record Profit
Bid for OAK, Cancellation of Bid for OAK
Flooding affecting franchisees
Only short term negatives imo, other news is positive.

Overall
Good finances and growth.
Undervalued SP.
Low liquidity.
Good trend, bar the loss of comfidence due to the OAK bid.
Fine market cap.
Fine industry, but the donuts imo could be a problem in the future.
Fine news.

Overall a quite safe and good investment. The only problems are the liquidity, unhealthy donuts and potentially consumers spending less.