BC Business
The Keg is eating up profits
You'd think a chain of restaurants premised on the consumption of red meat wouldn't have the brightest future. But consumers intermittently house-bound for the past two years are flooding back onto barstools and patios to get together again with friends and family.
The stock: Quick, what Richmond-based company has seen its stock rise 15 percent year to date while the S&P/TSX Composite sagged 5.9 percent? If you answered The Keg Royalties Income Fund (TSX:KEG.UN), you win a set of steak knives! (Fine print: you don’t really.)
The drivers: Long-term, you’d think a chain of restaurants premised on the consumption of red meat wouldn’t have the brightest future. But this is a funny kind of recession we’re having, even if the doomsayers prove to be correct. Tourism and hospitality marketers have taken to calling it the Summer of Revenge, as consumers intermittently house-bound for the past two years flood back onto barstools and patios to get together again with friends and family. And The Keg, founded by casual dining pioneer George Tidball half a century ago, is still here to take advantage.
Royalty pool sales in the first half of the year were up nearly 150 percent compared to the same period in 2021, when government health orders in some provinces and states forced a portion of the group’s 107 restaurants to shut their doors. Distributable cash in the second quarter tripled year over year.
The company still has a way to go to return to pre-COVID sales, profit and unit price levels. But even with a dividend yield as rich as the Billy Miner Pie—nearly 7 percent!—the royalty fund is now earning more than it pays out as of Q2. It won’t suit everyone’s environmental, social and governance (ESG) diet, but this is one old-school restaurant concept likely to leave its shareholders a sizeable tip.
Word on the street: Investment research company Morningstar rates KEG.UN as undervalued, pegging its fair value at $17.56. The units were trading at $16.75 as of Tuesday’s close.
Coming & going: The flight of cannabis headquarters out of B.C. continues as Kelowna-based The Valens Company (TSX:VLNS) has entered into an agreement to be acquired by SNDL (NASDAQ:SNDL) of Calgary in an all-shares transaction valued at $138 million.