A leading analyst has lifted Burger King Worldwide’s credit rating, citing the hamburger chain's reduced debt and profit growth.
Analyst Charles Pinson-Rose said Burger King's operating trends have improved this year and said that his rating uplift was based on a stable outlook and incorporates “further credit ratio enhancement in 2012 resulting from positive comparable-store sales, international store expansion, and cost management”.
He said: “The rating action comes after Burger King's positive operating trends in 2012. Year-to-date EBITDA is up close to 20%, reflecting comparable-store sales growth of 4.5%, international restaurant expansion, and administrative cost management. While we expect sales trends may moderate for the remainder of 2012, we are still forecasting meaningful profit growth. Moreover, the company has generated significant free cash flow and reduced debt, and we foresee this continuing.”
He said the business risk is “fair” given the competitive nature of the fast-food industry and its vulnerability to economic conditions. He raised Burger King’s corporate credit rating to “B+,” which is four notches below investment grade, from “B.” The outlook is stable.
Our outlook on Burger King is stable, incorporating our expectation that
operating trends will continue to improve in the second half of 2012 and that Burger King will use free cash flows to reduce debt, leading to leverage in the low-5x area by the end of 2012.
Pinson-Rose said: “We would consider a higher rating if we believed Burger King could further improve credit ratios such that adjusted leverage would be around 4.5x and coverage was near 2.8x. We do not foresee that occurring in 2012. However, if Burger King improved EBITDA to the range of $720m-$730m and the company reduced debt by an additional $350m from current levels, we estimate the company could reach those thresholds.
“We could consider a lower rating if operating trends worsened and the company ceased to repay debt with excess cash flow. For example, if leverage was in the mid-5x area and coverage in the low-2x area, we would likely lower the rating. This could occur if the company meets our expectations for 2012, but in 2013, EBITDA declined by about 16%-18% and the company did not repay any debt with excess cash flow.”
Burger King went public on the New York Stock Exchange in June. It had been acquired and taken private by the investment firm 3G Capital at the end of 2010.
