Retail Food Group (ASX:RFG): The most underrated ASX fast food stock might be about to boost its profile

Retail Food Group (ASX:RFG) is flying under many investors’ radars, and we think it is simply because its share price is below 10c. This company is actually worth nearly $200m, but its 2.5bn shares on issue makes it look like a penny stock to some investors. Nothing could be further from the truth.

What has also hurt its reputation is that fast food stocks have not been as resilient as they typically have been in tough economic times. This is because even though some have seen growing sales, they have struggled with high costs and intense competition. But this is not the case with Retail Food Group.

Introduction to Retail Food Group and its (mixed) past

First of all we should note that this company just unveiled a plan to rename itself Savora Brands, although we will use the old name for now. The company, which has its headquarters in the Gold Coast suburb of Robina, owns retail fast food brands including Gloria Jeans, Michel’s Patisserie, Donut King, Crust, Pizza Capers, Brumby’s Bakery, Cafe2U and The Coffee Guy. Of these, Donut King is the biggest with 204 outlets and 15.9m customers, followed by Gloria Jeans with 136 outlets and 11.1m customers.

You may know some of these brands, but you may not know what they all have in common. These are all franchisees that serve coffee and ‘cheaper’ fast food. They also aren’t foods you may just consume for lunch or dinner, you can consume at any time of the day. And the company is not just in Australia, but in over 30 countries around the world. The company’s history all began with Donut King and ‘BB’s Coffee & Bake’ in the early 1980s before the company gradually expanding over time. Key moments came in the mid 1990s when RFG established a franchisee training academy, the company’s ASX listing (in 2006), and in 2012 when it bought Pizza Capers and Crust Gourmet Pizza (thus entering QSR).

RFG has not had the best history with a number of lawsuits launched by franchisees against the company over several issues. One was ‘fresh to frozen’ changes at Michel’s that led to franchisees needing to drive long distances to collect frozen cakes and this impacted the quality and reputation of the end products. Another was allegations the company sold franchises that were operated at a loss, but this fact was not disclosed to buyers.

These controversies impacted RFG for years, but are now firmly in the rear view mirror, with the last controversy being resolved by a confidential settlement in May 2024, that would have no impact on the FY24 results.

Sailing in FY24 while its peers paddle (or sink)

Many investors would know the struggles of fast food stocks like Dominos (ASX:DMP) where margins have been hit as companies cut costs to compete, including putting expansion plans on hold. This has not been the case with RFG. The secret to its success has been bundling rather than discounting, which leads to higher transaction values.

RFG has also expanded into eCommerce with its own online delivery portals for some of its brands that keep more money in the company’s hands, rather than seeing it leak to a food delivery service.

One of the highlights of this year has been the launch of Donut King Occasions where Donuts can be delivered direct to customers for celebrations or other occasions. Stores fulfil the orders, while RFG organises the e-commerce, delivery and service. As you’d expect, order volumes are a lot higher than most other store sales. Plus, the rule that each store can only service an area of up to 10km, minimises delivery costs.

FY25 set to be a good year

RFG’s underlying revenue increased 13% to $114.9m, its bottom line flipped from an $8.9m loss to a $5.8m profit. In the first 6 weeks of FY25, the company reported network sales were 2.3% higher than the year before. No specific guidance has been given.

Analysts covering the company call for $132.4m in revenue and $33m EBITDA for FY25, followed by $142.6m revenue and $36.8m EBITDA in FY26. Their mean target price is 11c, up from 7c currently.

Australia is in an uncertain environment economically. Although rate cuts are coming, they will come well after many other countries have begun theirs – perhaps not until next year. Despite the fact that the retail sector is doing it tough as consumer spending slows, the RBA is stuck navel-gazing on the headline inflation rate which has remained above its 2-3% target range.

But Retail Food Group has proven its capability in tough economic times and its bottom line has gone in the polar opposite direction to many of its peers in the consumer/retail space.

The one thing that needs to happen

If we one piece of advice for the company’s management, it is that a share consolidation should be undertaken. This would increase the company’s share price and make it more appealing to a broader range of investors. Because it is an appealing business and is expecting good times ahead, but the share price may still lag due to a lack of investor interest. But ultimately, the name change may have an impact, allowing the company to put the worst of its past behind it.

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