Monday, December 19, 2016

The Keg Royalties Income Fund

Sound bite for Twitter and StockTwits is: Could be expensive. I would not buy. It is not the simple the fund gets 4% of revenue of the Keg Restaurants deal that people say. This fund is more complex. 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.

I will still complain about what I have since 2012. This fund is almost entirely dependent on Keg Restaurants Ltd (KRL). Some 98.9% of the assets of the company are KRL assets and they stopped publishing the financial reports on KRL in 2010 after 3 years of earning losses.

The Fund directly earns interest income on the $57 million Keg Loan, with interest income accruing at 7.5% per annum, payable monthly. This was 15.6% of the fund's income in 2015. It used to be a lot more but it has been declining over the years.

Then there are Exchangeable Partnership units owned by KRL which have similar distribution and voting rights as the Fund units and are exchangeable into Fund units on a one-for-one basis. These Partnership units are shown as a liability to the fund. It would seem that KRL owns some 30% of the Fund through these units.

In other words this is not strictly as simply as it sounds that this fund just earns 4% of gross sales from Keg Restaurant Ltd. Even if this was true, I would still like to see how sound KRL is by being able to analyze KRL financials.

The Exchangeable Partnership units are presented in the Fund's financial statements as a financial liability and measured at fair value. Changes in fair value are recognized in profit or loss in the period they occur. Because of changes in the fair value of the exchangeable Partnership units is why this fund had a loss so far in 2016.

I have analyzed the Fund financial statement. However, I do not know what exactly I have learned. Without KRL financial statements it is hard to tell how solid the fund is. Being the restaurant business can be a very risky business considering how many restaurants go belly up. What I can look at is price and how good it is relatively.

I cannot check the current stock price via Price/Earnings per Share Ratio. The only EPS estimate for 2016 I can find for this stock is for $1.07. Since the EPS to the end of the third quarter is a loss of $0.02, I do not see this is viable.

The best estimate I can get for the Graham Price is $10.30. The 10 year low, median and high median Price/Graham Price Ratios are 0.73, 0.82 and 0.91. The current P/GP Ratio is 2.01 based on a stock price of $20.70. This would suggest that the stock price is relatively expensive.

I get a 10 year median Price/Book Value per Share Ratio of 1.34. The current P/B Ratio is 3.07 a value some 129% higher. The P/B Ratio is based on BVPS of $6.74 and a stock price of $20.70. The problem is that BVPS hit a peak in 2010 and has been travelling south ever since. This would suggest that the stock price is relatively expensive.

Because this used to be an Income Trust, you cannot really use the historical median dividend yield as a basis for looking at the stock price. This is because the dividend yields were a lot higher on Income Trust companies and corporations. The 5 year median dividend yield is 6.29%. The current dividend yield of 5.32% is some 15.4% higher. This would suggest that the stock price is relatively reasonable but above the median.

This stock has a P/S Ratio of 7.36. The current P/S Ratio is 8.46. The current P/S Ratio is based on Revenue estimate for 2016 of $27.8M and Revenue per Share of $2.45 and a stock price of $20.70. This would suggest that the stock price is relatively reasonable but above the median.

As far as I can see, there is only one analyst following this stock and his recommendation is a Buy. The 12 month target price is $23.00. This implies a total return 16.43% with 5.32% from dividends and 11.11% from capital gains. This is based on a current price of $20.70.

There is some analysis of this stock on Stock Newsweek. Its Value Composite score is 61 and the closer this score is to 100, the more overvalued a stock is. Joseph Solitro of Motley Fool thinks you should buy this stock for the high yield.

I will have only one entry for this stock this year. However, I did a more complete report on this company in 2015 and you can see that report here.

The last stock I wrote about was about was Stella-Jones Inc. (TSX-SJ, OTC- STLJF)... learn more . The next stock I will write about will be FirstService Corp (TSX-FSV, NASDAQ-FSV)... report learn more on Wednesday, December 21, 2016 around 5 pm. Tomorrow on my other blog I will write about Borrowing to Invest... learn more on Tuesday, December 20, 2016 around 5 pm.

The Fund is a limited purpose, open-ended trust established under the laws of the Province of Ontario that, through The Keg Rights Limited Partnership (the "Partnership"), a subsidiary of the Fund, owns certain trademarks and other related intellectual property used by Keg Restaurants Ltd. ("KRL"). In exchange for use of those trademarks, KRL pays the Fund a royalty of 4% of gross sales of Keg restaurants included in the royalty pool. 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.

See my website for stocks followed and investment notes. I have three blogs. The first talks only about specific stocks and is called Investment Talk. The second one contains information on mostly investing and is called Investing Economics Mostly. My last blog is for my book reviews and it is called Non-Fiction Mostly. Follow me on Twitter or StockTwits.

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