The Keg Royalties Income Fund

Sound bite for Twitter and StockTwits is: Dividend Growth Consumer. Price is reasonable to expensive. KBL must not only have revenue, but profit in order to pay into this fund. We do not know if they have profit or even positive cash flow. See my spreadsheet on The Keg Royalties Income Fund.

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.

The reason I do not like this fund is that they do not publish financial statements on Keg Restaurants Limited (KBL). All of the fund's income and some 99% of its assets depend on KBL. How can you tell if KBL is financially able to pay income to this fund if you cannot see their statements? Even worst to my mind is that they used to publish KRL's financial statements until 2010. They had 3 years of earnings losses to 2010 and stopped publishing KBL financials.

While the fund has a good yield, currently at 5.67%, there has not been much in the way of increasing distributions. Distributions are up by 1.58% and down by 0.54% over the past 5 and 10 years. Part of the reason for this is the drop in distributions that occurred in 2011 because of the change in tax rules. Another is distributions were flat from 2012 to 2014 inclusive. They started to increase distributions again in 2015. The most recent increase was in 2017 and it was for 3.1%.

I would not make a call on their ability to cover their distributions. They could in the past, but they are totally dependent on KRL's ability to pay them and this we do not know about. In the past the distributions have not been covered well. The Dividend Payout Ratio for 2016 for EPS is 1034% with 5 year coverage of $186%. The DPR for CFPS is better at 55% with 5 year cover at 57%. However, I like to see CFPS coverage at 40% or lower.

According to the fund, they have distributable cash of $12.8M and distributions of $12.6M with a distribution rate of 98%. However, according to the cash flow statement, the fund paid out to Fund Unit holders some $13M in distributions which gives a distribution rate of 102%.

The 5 year low, median and high median Price/Earnings per Share Ratios are 25.82, 28.21 and 30.61. The 10 year corresponding are 14.61, 16.60 and 15.58. The historical ratios are 10.52, 11.18 and 12.77. The current P/E Ratio is 14.94 based on EPS for the 12 months to the end of the third quarter of $1.34. This stock price testing suggests that the stock price is relatively reasonable and below the median.

P/E Ratios are going up because the stock price is going up while the EPS is going down. The main reason for the drop in EPS for this stock is that the Partnership units in this stock by KRL, which are a liability to the Fund, have gone up in value by some $11.4M between 2015 and 2016. The EPS dropped by some 89% between 2015 and 2016. That is EPS when from $0.99 to $0.11. Note that EPS hit a high point in 2009 and have been dropping since then.

The difference between the EPS loss of $0.37 for the first three quarters of 2016 and the EPS profit of $0.86 for the first three quarters of 2017 has all to do with changing fair values of KBL's Partnership units. I do wonder how real these values are. I do not find that the accounting is clean, clear and straight forward.

I get a Graham Price of $14.65. The 10 year Price/Graham Price Ratios are 1.04, 1.17 and 1.28. The current P/GP Ratio is 1.37 based on a stock price of $20.02. This stock price testing suggests that the stock price is relatively expensive.

The 10 year Price/Book Value per Share Ratio is 1.49. The current P/B Ratio is 2.81 a values some 89% higher. The current P/B Ratio is based on Book Value of $80.85M, Book Value per Share of $7.12 and a stock price of $20.02. This stock price testing suggests that the stock price is relatively expensive.

The problem is that the Book Value for this stock is dropping. The BVPS is gone down by 5.8% and 3.9% per year over the past 5 and 10 years. BVPS dropped by 12.8% in 2016. A dropping book value is never a good sign.

Even though this company did not change from an income trust to a corporation, its tax has changed to that of a corporation. This is the reason for the distribution decrease in 2011. Because of this I am looking at the median distribution yield from 2011 and that is 6.06%. The current yield is 5.67% a values some 6.4% lower. This stock price testing suggests that the stock price is relatively reasonable, but above the median.

The 10 year median Price/Sales (Revenue) Ratio is 7.36. The current one is 7.98 based on Total Revenue for 2017 of 428.5M, Revenue per Share of $2.51 and a stock price of $20.02. The current P/S Ratio is some 8.4% higher than the 10 year median ratio. This stock price testing suggests that the stock price is relatively reasonable, but above the median.

When I look at analysts' recommendations, I only find one and that is a Buy Recommendation. The 12 month stock price given is $24.00. This implies a total return of 25.55% with 19.88% from capital gains and 5.67% from dividends based on a current stock price of $20.02.

Saundra Reilly talks about this company on Simply Wall Street. Note she is wrong about no increases in the past decade as I have shown above. Andrew Walker at Motley Fool takes a look at this stock. See what analysts are saying about this stock on Stock Chase. The company is not well covered.

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. 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.

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)... learn more on Wednesday, December 20, 2017 around 5 pm. Tomorrow on my other blog I will write about How I Survived Layoff at 54.... learn more on Tuesday, December 19, 2017 around 5 pm.

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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