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MTY Food Group tests the limits of investor appetite

Since going public in 1995, MTY Food has made several acquisitions, including the Mr. Sub chain in 2011.

RAFAL GERSZAK/The Globe and Mail

Fast food mogul Stanley Ma's MTY Food Group Inc., which has seen its stock price quadruple in the past four years as it gobbled up Canadian restaurant chains, is now making its first foray into the United States.

In May, the Montreal-based company announced the takeover of Extreme Brandz, the owner of Extreme Pita and Mucho Burrito restaurants, which has about 40 outlets in the United States in addition to its 260 in Canada. At $45-million, the purchase not only was the biggest MTY has made, it was its first acquisition of a chain with a U.S. arm. MTY is in the last stages of finalizing the Extreme Brandz takeover, which should close within the next couple of weeks.

But Mr. Ma, whose company now owns a huge range of brands, from Thai Express to Mr. Sub to Jugo Juice to Country Style and two dozen others, has no intention of stumbling the way many other Canadian retailers have when they moved across the border.

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This is a "cautious" move, he insists, and he will keep Extreme Brandz's team of U.S. managers who know local customers and tastes. "Many Canadian retailers who have gone down [to the U.S.] have not done as well as expected, because they thought they could cookie-cut what they had succeeded at in Canada," rather than paying attention to the different conditions in the local market, he said.

Mr. Ma said MTY already has about 100 stores outside Canada, mostly in the Middle East, where it uses local partners. "Local expertise is the key," he said.

MTY's success in absorbing a lengthy string of acquisitions has contributed to the company's impressive stock performance. Mr. Ma started the company three decades ago with the creation of the Tiki-Ming Chinese food chain. It went public in 1995, and has made many purchases, including the 490-outlet Country Style coffee chain in 2009 for $16.5-million, and the Mr. Sub chain, for $23-million, in 2011. At the same time, the company has created several brands of its own.

Mr. Ma said that, while investors often focus on his purchases, there also has been considerable internal growth. "We not only depend on acquisitions," he said, adding that the company opens several dozen outlets among its existing brands each year.

Some analysts who follow MTY are getting a bit leery of the stock's upward trajectory. Leon Aghazarian at National Bank Financial says the stock is "a bit pricey," despite the fact the company generates a lot of cash, is essentially debt free, and the management has such a solid track record.

"It is not a bargain [although] I still believe in the quality of the company," the analyst said, adding that same-store sales have been soft in the last four quarters.

Still, Mr. Aghazarian agrees with Mr. Ma's cautious approach to the U.S. market. "The scale is small and that is a good entry size for them."

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Laurentian Bank's Michael Glen has downgraded MTY's stock, but not because of the U.S. foray. Mr. Glen said the share price has just appreciated so much recently that "the current valuation adequately reflects the company's future growth." He changed his rating from a "buy" to a "hold" in mid-August, with a one-year target of $31.50.

Martin Ferguson, a portfolio manager at Mawer Investment Management in Calgary, says MTY has done a remarkable job at compounding growth over the long term. The stock has a "very, very nice chart," which reflects both the pace of acquisitions and its internal expansion, he said.

Mawer portfolios hold about two million MTY shares, making it one of the company's largest shareholders, at about 10 per cent. (Mr. Ma holds 26 per cent). Mr. Ferguson said he has no particular target price at which he would begin to sell MTY stock.

It is important to note, Mr. Ferguson said, that while the U.S. move has received lots of attention, there is still also room for growth through acquisitions in Canada because the market is not yet saturated. Indeed, since the Extreme Brandz purchase was announced this spring, MTY has unveiled another domestic acquisition, of rival Quebec chain ThaiZone Inc., which has 24 outlets.

Mr. Ferguson said there are "incremental and new risks" in the foray into the United States, "but so far we have no reason to doubt Mr. Ma and his team's ability. We will certainly watch every step that they take for changes in the risk profile."


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MTY brands

Tiki-Ming, Sukiyaki, La Crémière, Au Vieux Duluth Express, Carrefour Oriental, Panini Pizza Pasta, Chick 'n' Chick, Franx Supreme, Croissant Plus, Villa Madina, Cultures, Thaï Express, Vanellis, Kim Chi, "TCBY", Yogen Früz, Sushi Shop, Koya Japan, Vie & Nam, Tandori, O'Burger, Tutti Frutti, Taco Time, Country Style, Buns Master, Valentine, Jugo Juice, Mr. Sub, Koryo Korean Barbeque, Mr. Souvlaki and SushiGo.





2012 revenue


2012 profit


Annual dividend

28 cents/share


0.9 per cent

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