A big helping of fresh capital must be found

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. ●