RBI Builds on Brand Momentum, Unit Prospects

With narrow-moat Restaurant Brands International QSR announcing sales results and management changes last month, our focus during its full fourth-quarter update shifted to profitability trends and an early read on 2019. While there were moving parts, we remain comfortable with our longer-term assumptions, including 5% annual net new unit growth, 2%-3% comps, and pro forma adjusted EBITDA margins growing to the mid-40s (reflecting franchisee fee/advertising fund accounting standards). On the basis of time value of money adjustments and a modest increase in near-term top-line assumptions, we plan to raise our $62/CAD 82 fair value estimate by a few dollars.

While adjusted EBITDA fell 4% in the quarter ($581 million versus $606 million a year ago), results were affected by roughly $11 million in lower fees from franchisees due to the timing of certain restaurant openings/franchisee renewals as well as nonrecurring compensation expenses and temporary closures for the new Tim Hortons "Welcome Image" restaurant format. Absent these expenses, we believe adjusted EBITDA would've come in closer to our full-year estimate of just under 42%. While the Tim Hortons remodeling will weigh on results in 2019, we still see a path to adjusted EBITDA margins in the mid-40s over time via system sales growth and SG&A controls.

We also believe fourth-quarter sales momentum at Tim Hortons and Burger King--and new modern restaurant formats for each--supports our long-term growth assumptions. As we wrote in our Jan. 23 note, fourth-quarter sales drivers at Tim Hortons (Breakfast Anytime, a stronger beverage lineup) and Burger King (strong value offerings, new premium launches, and app-specific marketing) should keep near-term comps around 2%. However, Tim Hortons remodels and Burger King of Tomorrow tests appear to be resonating and could offer modest upside as the year progresses when combined with other digital enhancements (loyalty programs, mobile ordering, delivery).

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