A big help­ing of fresh cap­i­tal must be found

Financial Mail - Investors Monthly - - Analysis - Marc Hasenfuss

Fast food and restau­rant coun­ters have proved an ap­petis­ing op­tion for longer-term in­vestors on the JSE. Spur Corp has pro­vided sump­tu­ous re­turns through ac­quis­i­tive growth, and Fa­mous Brands has been ex­pand­ing through rapid ac­qui­si­tion.

Not ev­ery­body can get the food fran­chis­ing busi­ness right, how­ever. There have been nu­mer­ous up­starts on the JSE try­ing their luck. Re­cently Taste Hold­ings made a promis­ing be­gin­ning with new niche brands, which spurred greater am­bi­tions. A de­ci­sion to take on the lo­cal rights for global brands such as Domino’s (pizza) and Starbucks (cof­fee) came at a great cost. In a sim­i­lar vein, em­pow­er­ment group Grand Pa­rade In­vest­ments is bat­tling for prof­itable trac­tion for its master fran­chise agree­ment for Burger King.

Gold Brands In­ter­na­tional (GBI) is the new­est fast-food list­ing on the JSE, hav­ing come to mar­ket in early 2016. But there are al­ready se­ri­ous ques­tions about the sus­tain­abil­ity of its busi­ness model. IM thinks pun­ters would do well not to risk some se­ri­ous in­di­ges­tion.

GBI’s fran­chise of­fer­ing re­volves mainly around the Ch­e­sanyama brand, but it also holds oth­ers such as 1+1 Pizza, Opa! Pi­ta­land, Chicken Wild Wings and Black Steer. It re­cently se­cured rights to con­cept brands such as Las Igua­nas, Café Rouge and Ed’s Diner.

In terms of rev­enue gen­er­a­tion, the bulk of the top line is gen­er­ated by Ch­e­sanyama. It serves more than two mil­lion cus­tomers a month, and there seems to be more than a sliver of a mar­gin in the busi­ness.

Gross mar­gin in the past year was 37.5%. GBI di­rec­tors say that though the num­ber of Ch­e­sanyama stores dropped to 141 out­lets in the past fi­nan­cial year, “sys­tem-wide sales” topped R294m, with a rise in av­er­age store sales of 5.2% as well as an in­crease in av­er­age spend a trans­ac­tion at store level of al­most 7%.

But this prom­ise could be wasted, be­cause GBI finds it­self in a ter­ri­ble fund­ing pickle.

Its bal­ance sheet re­flects the pre­car­i­ous po­si­tion of cur­rent as­sets of R18.5m be­ing smoth­ered by cur­rent li­a­bil­i­ties of about R47m. In other words, if cred­i­tors de­cided to call for set­tle­ment en masse, GBI could face a huge prob­lem cov­er­ing what it owes. GBI’s au­di­tors have raised a red flag over the firm’s go­ing-con­cern sta­tus.

At the time of writ­ing GBI had pro­posed sell­ing off the Black Steer brand for R3.2m to shore up its gristly bal­ance sheet. Clearly, such a lit­tle wind­fall — pre­sum­ing the sale ma­te­ri­alises — will not be enough to en­sure that GBI can con­tinue fund­ing the growth in the key Ch­e­sanyama brand or start rolling out newer con­cept brands to en­sure a more di­ver­si­fied rev­enue spread.

Some­how a huge dol­lop of fresh cap­i­tal must be found, which will be dif­fi­cult, con­sid­er­ing the col­lapsed share price and lack of gen­eral mar­ket in­ter­est in the com­pany. Pre­sum­ably its founders will need to grease the way for a new strate­gic share­holder with deep pock­ets to come on board.

That’s not go­ing to be easy, and in­vestors may pre­fer to de­cline any cheap help­ings of scrip un­til there is greater cer­tainty about fund­ing. ●

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.