Wednesday, December 18, 2013

Keg Royalties Income Fund

On my other blog I am today writing about The Folly with P/E Multiples...continue...

I do not own this stock of Keg Royalties Income Fund (TSX-KEG.UN, OTC-KRIUF). This was a stock suggested by one of my readers. I like dinning at The Keg. I find the food very good. At stock forums I viewed, investors liked this company as it is guaranteed 4% of the sales at Keg restaurants as income to the fund. So I decided to take a look at it.

In my original blog entry on this stock I wrote: "I will be upfront. I would not invest in this stock. If I understand the accounting records, I would be deeply concerned about two things, just as far as income is concerned. One, money is flowing into this fund from Keg Restaurants Ltd. (KRL) and this company, after a disastrous year in 2009, stopped publishing their accounting statements. The restaurant business is a tough business. If KRL is not making money how will they be able to pay money into this fund?

The second concern I have is that interest income makes up a large portion of the income of this fund. If I am reading the statements correctly, the fund loaned KRL $57M and is collecting 7.5% interest on this loan. This is a high interest rate under the current circumstances. And, we go back to the thought of, if KRL is not making money how will they be able to pay this interest?

Also, if I am reading the financial statements correctly, this fund pays a distribution to Class C shares held by KRL of $.0625 per share. In 2011 $4.275M was paid on Class C shares and fund got paid interest of $4.281M on KRL's loan. The notes say that this distribution is due to KRL as long as the note is outstanding.

I know that this income fund is due 4% of revenue for Keg restaurants. I understand that people think this is great, because no matter what, the fund is due this 4%. However, I would be very concerned about the ability of the restaurants to make money and paid this royalty."

I went looking again this year for KRL's financial statements and found ones for 2010. The earnings loss was less than for 2009, but it still had an earnings loss. I find more things that I do not like. For instance, as I read the financial statements, the reason that profit dropped was because of an increase in the"Fair value of Exchangeable Partnership Units" that Keg Restaurants Ltd. (KRL) owns in KEG.

Another thing is that everyone seems to say something like The Keg Royalties Income Fund distributes royalties of 4% of gross sales to unitholders each month. However, this is not strictly true. According to my calculations in 2012 4% of KRL sales is $19.4M and the fund paid out in distributions $10.9M or some 56%. The 7 year median payout comparing 4% of KRL's gross sales to KRI distributions is 68%.

The dividend yield is currently quite good at 6%. However, dividends have varied and there was a decrease in 2011. Over the past 5 and 9 years dividends have declined by 4.3% per year and 1.3% per year.

The stock price has done well and the stock price is up over 10% year to date. The total returns on this stock to date over the past 5 and 10 years is 32.16% and 14.72% per year with 19.21% and 5.03% per year in capital gains and 12.95 and 9.69% in dividends.

Revenue is increasing, EPS are growing not badly, but there is no growth in cash flow. For example, Revenue per share is up 9% and 17% per year over the past 5 and 10 years. EPS is up by 4.3% over the past 5 years using the 5 year running averages and is up by 8.3% per year over the past 10 years. Cash flow per Share is up by 1.6% per year over the past 5 years and up by 0% over the past 10 years.

As far as I can see the stock price seems to be relatively high. For example, the current dividend yield at 6% is some 46% higher than the 5 year median dividend yield of 11.08%. The current Price/Earnings per Share Ratio is 19.77 using the EPS for the last 12 months to the end of Quarter 3 and a stock price of $16.01. The 5 year low, median and high median P/E Ratios are 8.53, 9.30 and 10.07. There are rather low P/E Ratios, but a ratio of 19.77 is rather high for an income trust stock.

There is an interesting article in the financial post about Fairfax buying a stake in Keg Restaurants Ltd. Fairfax bought a 51% interest in this company. This is the company that pays royalties to The Keg Royalties Income Fund.

I can find no analysts that follow this stock. I still do not like this stock and I think that it is rather overprice. See my spreadsheet at keg.htm.

Vancouver-based Keg Restaurants Ltd. is the leading operator and franchisor of steakhouse restaurants in Canada and has a substantial presence in select regional markets in the United States. KRL continues to operate The Keg restaurant system and expand that system through the addition of both corporate and franchised Keg steakhouses. Its web site is here Keg Income Fund.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.


  1. Brilliant and brutally honest commentary. I learned an expensive lesson investing in a similar restaurant stock (that I am embarrassed to name) several years back. The dividend scheme sounded good but I should have done the detailed homework you have here. The mirage of high dividends overcame my distaste for fried chicken in a bucket and concerns about management dabbling in professional sports. Rule number 1: return of capital outweighs return on capital. Rule number 2: don't forget rule 1. Thanks again for the reminder.

  2. Everyone has invested in stocks that did not work out as we thought they should. The thing is not to keep repeating the same mistake.