Friday, December 5, 2014

The Keg Royalties Income Fund

I do not own this stock of The 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.

Let me first off say that this would not be a favorite stock of mine. This is because you cannot properly evaluate this stock. They are 100% dependent on Keg Restaurants Ltd. (KRL) for income and 99.6% of their assets are dependent on KRL, but they no longer publish the financial statements for KRL with the financial statements for this fund.

The fund published the financial statements for KRL between 2006 and 2010, inclusive. During these 5 years KRL had positive earnings in only one year and that was in 2007. The only part of KRL financials that is still published is the revenue for KRL. This is not good enough. This fund is dependent on KRL and I would want to know that they have the ability to pay the royalties to this fund.

The fund has two sources of income, KRL Royalties and interest on a loan to KRL. According to the statements KRL Revenue has 1.9% and 5.4% per year over the past 5 and 10 years. The income to this fund has grown at 12.5% and 9.6%. The main reason for the variance is prior to 2011 the KRL had an interest in the net earnings of their partnership with the fund. This in affect reduced the income to the fund almost in half.

Now the partnership units that KRL has in the fund are treated as a liability. This treatment, in effect lowers the fund's earnings. So if you look at the fund's earnings, they are down by 18.7% and 15.2% per year over the past 5 and 10 years. None of this is easy to understand and I do not like investing in complicated companies.

The fund is paying out in distributions in 2013, 213% of their earnings. The Dividend Payout Ratio for cash flow is better at 54%. If you look at what the company says is their distributable cash, in 2013 they are paying out 98.9% of distributable cash.

Shareholders have done well over the past 5 and 10 years. Total returns over these periods are at 18.23% and 10.81%. The portion of this total return from distributions is at 8.33% and 7.88%. The portion of this total return from capital gains is at 9.89% and 2.93%.

The debt ratios are good, with the Liquidity Ratio at 1.55 and the Debt Ratio at 1.75 for 2013. Leverage and Debt/Equity Ratios are a little high at 2.33 and 1.33. The intangible assets are at 84% of the fund market cap. The intangible assets are 72% of the total assets of the fund. (This would basically mean that the market is valuing the intangible assets lower than the fund is.)

The 5 year low, median and high median Price/Earnings per Share Ratios are 12.37, 13.90 and 15.42. The corresponding 10 years values are lower at 9.63, 11.02 and 12.49. The current P/E Ratio based on the 12 months earnings to September 2014 is 32.98. This stock price test says that the stock price is relatively high. On an absolute basis a P/E of 32.98 is high for this sort of stock.

The 5 year median Dividend Yield is 7.72% and the current Dividend Yield at 5.60% is some 27% lower. The current Dividend Yield is some 36% and 63% lower than the historical median and historical average Dividend Yields. By this test this stock is relatively expensive.

There is an interesting Financial Post article from 2013 talking about Fairfax Financial Holdings Ltd. buying a 51% stake in Keg Restaurants Ltd. . An investment reporter at the Globe and Mail, John Heinzl seems to like to stock. Richard Berger at Seeking Alpha also likes this stock. However, this last report is from early last year.

There is one analyst following this fund and he gives a recommendation a recommendation of a Buy.

Sound bit for Twitter and StockTwits is: Stock price is relatively expensive. Personally, I would not buy this stock as it is too dependent on KRL making money and the financials on KRL are not available. The arrangements with KRL also seem overly complex. The financial show that shareholders of this stock are not getting 4% of the revenue of KRL. It is much more complex than that. See my spreadsheet at keg.htm.

I will have only one entry for this stock as I must do on some stock because I cover too many stocks to do double entries on all that I follow.

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. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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