Burger King can stand the heat
Fast food expected to keep feeding growth as Grand Parade prepares to sell its best performer, Sun Slots
Leisure and gaming company Grand Parade Investments broke a twoyear losing streak to return to profit in the year to end-June, with the company expecting a turnaround in Burger King to fuel further growth over the next few years.
Leisure and gaming company Grand Parade Investments (GPI) broke a two-year losing streak to return to profit in the year to end-June, with the company expecting a turnaround in Burger King to fuel further growth over the next few years.
The company reported that operating profit more than doubled to R44.2m to end-June, benefiting from improved sales and profitability at Burger King.
Headline earnings per share jumped 180% to 8.91c, with same-store Burger King sales rising 10.3%, the company said on Friday. GPI saw a loss per share of 11.18c in 2018, and 4.59c in 2017.
Burger King added R11.7m to GPI’s profits, having contributed R27.1m of its loss in the prior year. The company added six restaurants during the period, bringing the total number it owns to 86.
GPI CEO Mohsin Tajbhai said on Friday that the group is targeting 12 new restaurants in this financial year and would be pursuing self-service kiosks and online-ordering services to improve competitiveness.
“We are not yet saturated in the SA market. We are still growing in brand popularity and there is a lot of opportunity for us,” he said.
“Burger King has performed well over the past financial year despite the tough trading conditions,” the company said. “The business has finally achieved both scale and profitability and is well positioned for growth over the medium term.”
The closure of Dunkin Donuts and Baskin-Robbins led to an improvement in the loss contribution of these two stores by R26.1m, though discontinued operations still weighed on headline earnings by R43.5m.
GPI said in February that it had decided to exit Dunkin’ Donuts and Baskin-Robbins, which would allow it to free up capital that would be channelled to high-value potential assets, such as Burger King.
Gaming interests continued to pay off, with Sun Slots contributing R55.2m for the period, up 50%. SunWest contributed R74.8m to headline earnings, down 4% year on year.
GPI has agreed to sell its remaining 30% holding in Sun Slots for R504m, saying on Friday that R220m of the proceeds would be used to pay down preference share debt secured by the asset. Management also intends to propose a special dividend and/or share buyback with the remaining cash.
GPI disposed of its 10% holding in Spur in July, for a total consideration of R260m, the proceeds of which are to be used to pay down its debt. GPI paid R294.7m for the stake in 2014.
The disposal of Spur for less than GPI paid for it shows the pressure the company is under. Despite the growth in Burger King, fast food remains a tough environment, Cratos Capital senior analyst Ron Klipin said.
Growth through acquisition has proved to be a problematic strategy, given the constraints on consumer spending, while a number of GPI’s competitors are aggressively seeking to preserve market share through special offers, Klipin said.
“They are getting back to their core products, which is overdue, while the exit of Hassen Adams, the founder of GPI, should result in a fresh pair of eyes, which is also possibly overdue,” he said.
Adams stepped down from the position of executive chair at the end of June, becoming a nonexecutive chair in July.
Burger King’s results were good, but questions linger over the Sun Slots deal price, board remuneration policy and governance, said Small Talk Daily’s Anthony Clark.
“Burger King is profitable, needs capital expenditure of R30m this year, but probably needs a little more cash to achieve its potential and, under the current Burger King agreement, only has to open five new stores a year hardly a stretch,” said Clark.
Sun Slots was GPI’s bestperforming asset. It is debt free, and is about to generate healthy cash flow, so it is questionable that they would sell it back to Sun International for what many believe is a bargain price of six times earnings before interest, taxation, depreciation and amortisation (ebitda), said Clark.
Tajbhai said on Friday that while GPI had previously sold a stake in Sun Slots at a 7.5 times ebitda multiple, “in the current environment that was a reasonable offer”.
The proceeds from the Sun Slots sale would allow GPI to unlock the dividends from SunWest, he said, as the dividends from the group’s gaming assets were previously just being used to service debt.
Total debt for the period fell 7% to R560m, with the group’s debt-to-equity ratio falling 0.2 percentage points to 30.3%. The company opted not to pay a dividend for the period.