IMVESCOR RESTAURANT GROUP INC. T.IRG

RE:Crescendo Partners getting active in IRG

[dpunt32]

here is full letter they sent to board..they think that with a dividend of 12c and 15c the stock can be worth between $2.07 and $2.59 per share, reflecting upside of 20% and 49% respectively

 The full text of the letter is as follows:

September 22, 2014

Imvescor Restaurant Group
Attn: Board of Directors
774 Main Street, Suite 400
Moncton, NB
E1C 9Y3

Dear Board of Directors:

Crescendo Partners and its affiliates control very close to 10% of the outstanding stock and warrants of Imvescor Restaurant Group L.P. ("Imvescor" or the "Company"). We invested in Imvescor over a year ago, due to its strong cash flow generation, its high return on invested capital (ROIC) franchisor business model, and the significant upside in the stock price due to what appeared to us to be material undervaluing by the market. Unfortunately, this undervaluing has persisted. One of the main reasons we believe the stock is still trading at a significant discount to its peers is its lack of a dividend. We strongly believe that the Board should implement a meaningful annual dividend of $0.12 to $0.15 per share payable quarterly, which would imply a dividend yield of between 6.9% and 8.6%, respectively.

A $0.12 to $0.15 dividend is indeed appropriate as it will result in the company paying shareholders between $5.1 million and $6.5 million annually¹  implying a dividend payout ratio of between 40% and 55% of the LTM free cash flow², respectively. Since fiscal 2011 (year-end October 2011) the Company has generated free cash flow of $7.3 million in 2011, $10.5 million in 2012 and $9.7 million in 2013.  Furthermore, during the last twelve months, Imvescor has generated $11.7 million of free cash flow.  Based on our expectations for 2015 and beyond, we consider that a dividend of this size will be entirely manageable and will help to highlight the value inherent in Imvescor's stock. Clearly, the initiation of a dividend will substantially enhance market confidence by virtue of its reflection of the Company's own confidence in its ability to generate consistent and recurring free cash flow.

We were attracted to Imvescor due to the Company's strong cash flow generation and stable revenue base. Imvescor's four restaurant concepts generated nearly $370 million in system sales during the past 12 months, and the Company receives a blended royalty rate of approximately 4.7% (based on 3^rd quarter filings on SEDAR). In addition to franchise revenue, Imvescor generates revenue from owned store sales and retail sales. Given that franchisees are responsible for maintenance of existing locations, Imvescor has a substantially reduced capex burden resulting in high ROIC potential.

Nevertheless, Imvescor's stock has remained deeply and frustratingly undervalued compared its peers.  Its closest peers include Boston Pizza Royalties Income Fund, MTY Food Group Inc., A&W Revenue Royalties Income Fund, Keg Royalties Income Fund, and Pizza Pizza Royalty Corp. As you can see below, Imvescor trades at a significant discount to these companies based on nearly every metric.

 

Symbol	Company Name	LTM		2015E		Dividend	Yield
		EV/EBIT	EV/Rev	EV/EBIT	EV/Rev
TSX:BPF.UN	Boston Pizza Royalties Income Fund	12.7x	12.2x	11.8x	10.8x	$     0.31	5.9%
TSX:MTY	MTY Food Group Inc.	18.2x	5.9x	12.2x	5.0x	$     0.09	1.0%
TSX:AW.UN	A&W Revenue Royalties Income Fund	14.8x	14.5x	12.8x	12.6x	$     0.35	5.7%
TSX:KEG.UN	Keg Royalties Income Fund	8.5x	8.3x	9.4x	7.7x	$     0.24	5.7%
TSX:PZA	Pizza Pizza Royalty Corp.	14.3x	14.0x	13.6x	0.9x	$     0.20	6.0%
	Average	13.7x	11.0x	12.0x	7.4x		4.8%
TSX:IRG	Imvescor Restaurant Group Inc.	6.1x	1.7x	5.9x	2.2x	$           -	0.0%

** Source: S&P Capital IQ

In our considered opinion, the reasons for the persistent undervaluing include:

• Shareholders are unhappy that the company was not able to complete a sales transaction.
• Shareholders want to meet the new CEO and understand his plan to execute the turnaround of each concept, including his views on how to improve sale trends. 
• Shareholders need to be assisted in developing their views as to the ability of the new CEO to actually execute on the initiatives in his plan. 
• Importantly, the Company's reluctance to return cash to shareholders reflects poorly on corporate confidence and is discouraging to actual and prospective investors.

In conclusion, although numerous shareholders such as ourselves are disappointed that Imvescor was not able to complete a transaction with a potential acquirer, we believe that the implementation of a $0.12 to $0.15 dividend will be well received by investors and help restore confidence. In fact, we are aware that a very substantial portion of existing shareholders are supportive of implementing a dividend 

From a dividend yield perspective, IRG's peers trade in a narrow range. This gives us confidence that the implementation of an appropriate dividend would help support a stock price at a healthier level reflecting improved relative valuation metrics. Subject to only one outlier in the table above, the average dividend yield for the Company's peers is 5.8%. If Imvescor were to institute an annual dividend of $0.12/ share we believe, based upon peer group dividend yields, that its shares would trade at or about $2.07. Similarly, at an annual dividend of $0.15/share we believe that the shares would trade at or about $2.59. These prices reflect upside values of 20% and 49%, respectively. The implementation of a dividend yield at these levels would leave room for future increases as the Company's performance improves.

Yours Truly,
(signed)	(signed)
Eric Rosenfeld	Gregory Monahan
Managing Member	Managing Director

¹ We have assumed 42.73 million shares and did not take into the warrants under consideration.  The 15.3 million warrants would increase the annual dividend by between $1.8 million and $2.3 million, but it would also provide the Company with approximately $9.9 million in cash 
² We define Free Cash Flow as Cash Flow from Operations

SOURCE Crescendo Partners