The Keg Royalties Income Fund

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Sound bite for Twitter and StockTwits is: Relatively Expensive? I would not personally buy this stock as I do not feel that I understand its statements. This company depends for the majority of assets on Keg Restaurants and I have no idea how well or poorly the Keg Restaurants are doing. See my spreadsheet on 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.

As a lot of old income trust companies did, this company cut their dividend when tax rules changed for income trust companies. The cut was in 2011 and it was for 25%. There was no distribution increase until 2015 and this increase was for 3%.

Is there room for more growth in distributions? Curiously, the growth in royalty income has been much slower than the growth in 4% of gross sales under the Keg Restaurants (KBL). It would seem from what I gleamed from annual reports that this income fund received less than 4% of sales in the past but now seems to be receiving close to 4% of sales.

Growth in Royalty Income over the past 5 years is 140% and growth in 4% of Gross Sales of KBL was at 14.47%. In 2009, 4% of Gross Sales of KBL was $18.2M, but the fund seems to have received $8.7M. In 2014 Gross Sales of KBL was $20.8M and Royalty Income was $20.9M. When the company was publishing annual statements from KBL it was publishing KBL Revenue. This was between 2006 and 2010. 4% of this KBL Revenue is close to this fund's Royalty Income between 2006 and 2010.

This brings me to another point. Keg Restaurants Ltd (KBL) statements were not published after 2010. This was after 3 years of negative income by KBL.

The company is paying out around 99% of its distributable cash to unit holders. However, they are also paying out distributions to unitholders called Class C and Exchangeable Unitholders. If you include distributions to these unit holders, then the fund is paying out in 2014, 171% of its distributable cash.

This company depends for the majority of assets on Keg Restaurants and I have no idea how well or poorly the Keg Restaurants are doing. They no longer publish KRL statements. In 2014 97% of their assets depend on KBL. Goodwill and intangibles make up 70% of their assets and 79% of the funds market cap.

Shareholders, so far, are doing well. The 5 and 10 years total return on this income fund's stock is at 13.29% and 11.58% per year to date. The portion of this total return attributable to capital gain is 6.64% and 3.69% per year. The portion of this total return attributable to dividends is 6.64% and 7.89% per year.

So let's look at the stock price reasonability. The 5 year low, median and high median Price/Earnings per Share Ratios are 23.55, 24.95 and 26.36. The corresponding 10 years values are much lower at 10.51, 11.75 and 12.98. This is because P/E Ratios have been higher than usual lately. The current P/E Ratio is 27.63 based on a stock price $17.56 and EPS over the past 12 months of $0.65. No one is giving EPS estimates. This stock price testing suggests that the stock price is relatively expensive.

I get a 10 year Price/Book Value per Share of 1.34. The current P/B Ratio is 2.28 based on BVPS of $7.89 and a stock price of $17.56. The current P/B Ratio is some 69% higher than the 10 year ratio. The reason for this is that the BVPS is going down. The 5 year IRR for BVPS is a negative 5% per year. This stock price testing suggests that the stock price is relatively expensive.

The current dividend yield is 5.65% based on dividends of $1.01 and a stock price of $17.56. The 5 year median dividend yield is 6.94% a value some 19% higher. This stock price testing suggests that the stock price may be relatively reasonable, but at the top end of the reasonableness range. If the difference was 20%, then the stock price would be relatively expensive.

There are only estimates for Revenue and then only for Royalty Income. If I use this and interest income, then I get a current P/S Ratio of 7.64. The 2015 Royalty Income is $22.4M. The 10 years P/S Ratio is 7.36. This stock price testing suggests that the stock price is reasonable.

There does not seem to be any stock analysts' recommendations for this fund.

There was an announcement on Stock House that this income fund was raising its distribution for December 2015. According to Stock Informant site, there is a special distribution of $0.07 in December.

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 The Keg Royalties 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.

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