Retail Food Group (RFG), which owns a diverse range of food groups include bakery chain Brumby’s, Gloria Jean’s coffee, Donut King and Crust Pizza has taken issue with an analyst’s report that saw an 11% slide in the value of the company on Monday, calling its analysis “premature, precipitous and… an exercise in speculative guesswork”.
RFG said in a statement to the ASX yesterday (https://www.rfg.com.au/images/investor_docs/MarketAnnouncement.pdf) that UBS was wrong in the conclusions in the report last Friday about the likely impact of new lease accounting standards on RFG’s bottom line.
RFG denied there will be any impact on the company’s business model or cash flows, and that its lenders are unfussed.
RFG’s shares tumbled 11.3% on Monday after UBS, which has a “sell” rating on the stock, cut its price target for the company by 17.5% to $4.70 “to better reflect the risk of upcoming accounting standard changes”.
RFG shares rose 3.2% to $4.78 yesterday.
The new accounting standard starts from July 1, 2019. The accounting change relates to the treatment of leases, which the broker considered severe enough to downgrade their share price target on RFG.
RFG said UBS made “broad unsubstantiated assumptions" in their analysis.
“The company continues to enjoy a strong relationship with its lenders, who are well aware of the leasing structures which have been employed by the group since listing in 2006, and have expressed no concern in respect of the same,” the statement to the ASX read.
Under new rules from the International Accounting Standards Board, operating leases will be consolidated onto balance sheets globally in the 2019 financial year.
RFG’s latest disclosures show it has $15 million in lease debt, but UBS predicted this would be much higher.
RFG told the market the UBS report made "broad unsubstantiated assumptions" about how the accounting changes would effect the company, and had failed to consult with them.
"RFG has little insight into the basis upon which the UBS reports were prepared. Indeed, at no stage prior to publication of the UBS reports did UBS consult with or seek engagement with the company regarding the matters outlined in the UBS Reports," it said.
"Significantly, UBS would have no insight into the company’s position in respect of the impact (if any) of [the new accounting standards], nor that of its bankers."
RFG also said it would update the market on the likely impact of the accounting changes in its financial statements, as per usual practice.
"RFG considers that any assumptions as to the potential impact of [accounting changes] on the company’s financial statements, lending covenants or other debt arrangements is both premature, precipitous and with respect, an exercise in speculative guesswork.
"Importantly, there has been no change to RFG’s business model or underlying cash flows, and RFG’s lenders are aware of the impending accounting changes … from 1 July 2019.
UBS analyst Jordan Rogers told clients last Friday,"Our interpretation based on financial disclosures is that this is a lease figure that is net of sub-leases to franchisees.
"When reviewing against the accounting standards, we believe that it is likely that the full lease obligation – including where RFG has the head lease agreement for an outlet with a shopping centre and has sub-let to a franchisee – will be consolidated onto the balance sheet.
"Although RFG’s cash flows should not be affected by (the new rule) we believe the increased disclosure on leasing arrangements will highlight that the company could be liable for lease payments should a franchisee come under financial difficulty.
"We maintain our Sell rating on RFG, and now apply a $105m discount to valuation when setting our price target."
