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Franchise operator's steady growth whets investor appetites

Shareholders of Imvescor Restaurant Group Inc. are benefiting from the ongoing revamp of the franchise operator's brands – and analysts are forecasting more growth ahead.

Shares of Montreal-based Imvescor, which has about 260 restaurants including Pizza Delight, Toujours Mikes, Scores, Bâton Rouge and recently added Ben & Florentine, are up nearly 25 per cent over the past year. Both analysts that cover the stock have a "buy" recommendation and an average target price of $3.88, which is about 18 per cent above its current price of around $3.30.

Analysts point to steady growth in same-store sales for the past seven consecutive quarters, and its cheaper valuation compared with industry peers as good reasons to own the stock. Imvescor also pays a quarterly dividend of 2.25 cents, which currently yields about 2.7 per cent.

"It's been a bit of a turnaround [story] over the past few years," says Laurentian Bank Securities analyst Elizabeth Johnston, who has a $3.75 price target on the stock. Her positive outlook is based on the steady improvement in same-store sales, which has been driven in part by restaurant renovations and menu improvements across brands, as well as an increase in its restaurant count.

Imvescor also recently bought Ben & Florentine, a chain of breakfast and lunch restaurants. Earlier this month, it sold its Commensal prepared meals business for $4.2-million, to focus on its core restaurant-franchising business.

Imvescor's recent moves appear to have appeased two New York investment firms, ADW Capital Partners and Camac Partners, who last summer called on the company to put itself up for sale.

The long-time shareholders, which together own about 16 per cent of Imvescor shares and warrants, wrote a letter to the board in August praising the company's operational decisions since chief executive officer Frank Hennessey took over in 2014, but said the company was "at a crossroads."

In an interview, Adam Wyden, managing member of ADW Capital Partners, said selling the company was just one suggestion.

"I do think the company is starting to take a measured approach to growth," Mr. Wyden said. "I'd like to see them grow quicker, but provided they start doing more deals and growing more stores … then it makes sense for them to embark on this strategy."

Mr. Wyden says his holdings are roughly the same as they were when they wrote the letter in August, and is "anxious to see the next card" played by the company. He remains concerned about the company's lower valuations as compared with a peer, such as MTY Food Group Inc.

Still, he remains concerned about the company's lower valuations as compared to a peer like MTY Food Group Inc. (MTY is currently trading at an enterprise value-to-earnings before interest, taxes, depreciation and amortization [EV/EBITDA] multiple of approximately 18.5 times, compared to 11.7 times for Imvescor).

"I'm happier than I was before," Mr. Wyden says, "but it's impossible not to be frustrated by the fact that it's still trading at a material discount to MTY."

In an interview, Mr. Hennessey said the letter from the U.S. shareholders "did not and has not altered our approach, at all."

He also said the company continues to look for acquisitions that fit the brand.

"I'm not that interested in operating sexy restaurants in big urban centres," Mr. Hennessey said. Instead, the company is focused on smaller cities and communities that are more affordable and family-oriented.

The majority of Imvescor's restaurants today are in Quebec, and Mr. Hennessey is looking to expand more in Ontario, given its size and population. He says the company is specifically looking for a franchise business, or a brand that can be franchised.

"We would look at fast-casual, but sit-down, family restaurants are really our sweet spot," Mr. Hennessey said. Peter Imhof, vice-president and portfolio manager at AGF Investments, said Imvescor could be a takeover target, but wouldn't recommend investors get in based on that possibility.

He doesn't own the stock, in part because as a small cap (market capitalization about $200-million) it's not very actively traded. "Maybe a lot of the move in the stock has already taken place because they have been able to be successful over the last 18 months," Mr. Imhof said.

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