Yum! Brands' (YUM) Sum-of-the-Parts Value is $74/Share, Says Deutsche Bank
Deutsche Bank maintained a Hold rating on Yum! Brands (NYSE: YUM) with a price target of $76. Comments follow news Yum! plans to separate into two publicly traded companies. Analyst Karen Short thinks its sum-of-the-parts value is $74 per share. Both units were assigned a 12x EV/EBITDA multiple.
"Our sum-of-the-parts ("SoTP") values both YUM China and YUM ex. China at 12x for each division and this gets us to an SoTP valuation of $74/share. We assign no debt to China, and we add an incremental $9b in debt to the remaining business to lever the non-China division to 6x. We assume YUM buys back 112 million shares with the incremental debt, and we use an $80 share price in our analysis," said Short.
"Obviously investors who are positive on YUM will point to the fact that our multiples are too conservative, skeptics will assign an even lower multiple to both divisions. We sit somewhere in between," added the analyst.
Discussing China in more detail, Short said, "Our hesitation on assigning a higher multiple to the China division is based on the following: 1) Sales trends have become exceptionally volatile over the last several years (and even more so in the last several weeks) and this warrants a more conservative multiple, 2) Pizza Hut China (1/3 of the division) has demonstrated even greater top line volatility than KFC China and is arguably structurally challenged – losing share at the high end to the mall-based competitors, and losing share on the low end to mom & pops and “aggregators”, 3) the competitive landscape is intensifying (40% of mall space is allocated to food – and YUM has very limited presence in malls), and 4) it isn’t clear to us that a spin-out is even feasible given how undeveloped the (Shanghai) market is. Offsetting these four concerns: 1) China will be 100% franchised, and 2) China will be virtually debt-free. We factored all of these variables in to our 12x China Multiple."
Discussing ex China valuation, the analyst said, "Our multiple is based on the following considerations: 1) Pizza Hut is facing several structural and strategic challenges – and should be valued at a discount to Taco Bell and KFC, 2) the remaining business should be 6x levered – so while leverage doesn’t typically concern us for robust business with strong comps and fundamentals (DPZ comes to mind) challenged Pizza Hut (ex China) accounts for 22% of the remaining business, 3) Free cash flow should increase significantly given that China did account for approximately 80% of YUM’s consolidated capex, and 4) YUM should use ~$9b in incremental debt to buy back stock."
For an analyst ratings summary and ratings history on Yum! Brands click here. For more ratings news on Yum! Brands click here.
Shares of Yum! Brands closed at $71.71 yesterday.