Retail Food Group Limited

RFG Details

Revised FY17 guidance downwards: Share of Retail Food Group Limited (ASX: RFG) tumbled 10.4% on 21 June 2017, after announcing the revised outlook for FY17. The company expects 15% yoy underlying net profit after tax (NPAT) for FY17 against the previous guidance of 20% yoy growth and expected to deliver an 8% increase in earnings per share.  The company has relied on growing through bolt-on acquisitions and increasing its store network had been impacted by franchise growth hurdles in overseas and unspecified supply chain issues affecting its Michel's Patisserie bakery business. Further, recoverability of advances made by the group to the Michel’s Patisserie and Pizza Capers Marketing Funds had been reassessed, and a $22m non-cash write-down will be recorded in FY17 results (as a non-core expense).

International operations have continued to enjoy organic growth in FY17, even though impacted by timing relating to the conversion of significant new Master Franchise Agreement (MFA) opportunity which will now be concluded in FY18. The company remains positive regarding its international MFA growth given the number of licensing matters presently being negotiated, noting that licensed territories have increased from 46 to 80 in less than three years, including the important 2H17 grant of a Gloria Jean’s Coffees MFA for the United Kingdom. Overall, domestic franchising in FY17 is trading in line with FY16, with growth across most Brand Systems offsetting a decline for Michel’s Patisserie, which has been impacted by third party supply chain issues experienced in transitioning the network operating model to instore customization. The stock has declined 25% over the past six months (as on June 21, 2017), and currently trading at low levels. We give a “Buy” rating on the stock at the current market price of $4.56


RFG Daily chart; (Source: Thomson Reuters) 

QBE Insurance Group Ltd

QBE Details

FY17 earnings to be subdued: Shares of QBE Insurance Group (ASX: QBE) tumbled 10.3% on 21 June 2017, after downgrading the expected earnings due to underwriting losses in its emerging markets division. The company revealed that an increase in weather-related claims in Latin America and a higher frequency of medium-sized risk-related claims in Asia would lift its combined operating ratio by 1% from earlier guidance (higher combined operating ratio translates to lower underwriting profits for insurers). However, the company had been taking steps to boost earnings by cutting costs, putting in place a comprehensive re-insurance plan, changing management teams and selling non-core or underperforming businesses.

Further, heightened claims activity in emerging markets would drag down the company's results and forecasts a combined operating ratio of about 110% in the emerging markets division (ratio of more than 100% indicates underwriting losses). The company's overall combined operating ratio is now forecast at 94.5% to 96% compared with February guidance of 93.5% to 95%. Further, it expects interim insurance profit margin to be in the range of 8.5% to 9.5% against 9.7% in 2016. Moreover, it anticipates the market to remain challenging in 2017 though there were indications of a modest improvement. The stock has moved up 5.0% over the past six months (as on June 21, 2017), while it was up 12.5% in the past one year. Given the latest developments and challenging business scenario, we give an “Expensive” recommendation on the stock at the current market price of $11.87


QBE Daily chart; (Source: Thomson Reuters)

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