Hot in the kitchen

Financial Mail - - MARKET WATCH - @mar­chasen­fuss

No, thank you. I’ll not be nib­bling at food con­glom­er­ate Fa­mous Brands just yet, as trad­ing con­di­tions in the next few months may still prove un­savoury. The big­gest un­cer­tainty, for me, is how much flavour the profit recipe will lose through pay­ing up to buy Gourmet Burger Kitchen (GBK) from Nando’s Group. One can only hope the com­pany direc­tors’ medium- to long-term con­fi­dence in GBK is not mis­placed. Iron­i­cally, the deal was struck not long af­ter ri­val Spur Corp re­treated from the UK, where trac­tion was elu­sive.

With Fa­mous Brands’ gear­ing lev­els tighter and a fur­ther de­te­ri­o­ra­tion in trad­ing con­di­tions likely, it is no sur­prise the in­terim pay­out was skipped.

Would there per­haps be an ap­petite for a rights is­sue? Prob­a­bly not, at least while the share price re­mains brit­tle. Is there any chance of Fa­mous Brands sell­ing off more mar­ginal brands and low(er)-mar­gin op­er­a­tions? It seems un­likely at this junc­ture.

Direc­tors have ad­vised that op­tions are be­ing re­viewed to en­sure that the al­lo­ca­tion of cap­i­tal re­serves op­ti­mises the re­turn on in­vest­ment for share­hold­ers in the fu­ture. These in­clude — and I sus­pect this is in or­der of pref­er­ence — ac­cel­er­ated debt re­duc­tion, div­i­dend pay­ments and ac­qui­si­tions.

In fact, direc­tors said they re­main “re­cep­tive to prospec­tive lo­cal ac­qui­si­tions which align with the group’s core com­pe­ten­cies and which will fur­ther its goal to be the lead­ing in­no­va­tive branded fran­chised and food ser­vices busi­ness in SA and se­lect in­ter­na­tional mar­kets by 2020”.

I won­der if a se­ri­ously stretched fast-food counter such as Taste, which holds the lo­cal rights to Star­bucks and Domino’s Pizza, might not be un­der care­ful scru­tiny from Fa­mous Brands.

Two big in­ter­na­tional brands could add con­sid­er­able long-term earn­ings flavour to Fa­mous Brands. The group also has the fi­nan­cial mus­cle (and ex­pan­sion ex­per­tise) to en­sure a re­as­sur­ing pace in store roll-outs.

Lewis not loung­ing around

I’ve never re­ally been en­am­oured with re­tail stocks, but I am start­ing to fancy Lewis at cur­rent lev­els. The trad­ing up­date for the six months to end­septem­ber was hardly in­spir­ing, but it was by no means worse than the mar­ket could have rea­son­ably ex­pected un­der tough cir­cum­stances.

What I did take heart from was that com­pa­ra­ble store sales in­creased 7%, with the over­all gross profit mar­gin fat­tened by 40 ba­sis points to 40.9%.

The share ini­tially fell last Fri­day when the trad­ing up­date was is­sued, but the price had firmed at the time of writ­ing. Pre­sum­ably some mar­ket par­tic­i­pants re­crunched the num­bers and fig­ured that Lewis — which of­fers a use­ful div­i­dend yield — might be worth ac­cu­mu­lat­ing on a long-term view.

It’s worth re­mem­ber­ing that the share is still trad­ing be­low the lev­els at which Lewis em­barked on a share re­pur­chase ex­er­cise. Be­tween the end of May and end of Septem­ber Lewis spent R94m buy­ing back 2.94m shares (or 3% of its is­sued shares) at prices rang­ing from R28.62-r35.50/share.

Pa­tience for pa­tients

A re­cent ar­ti­cle in the Wall Street Jour­nal noted that US hos­pi­tal op­er­a­tors are in­vest­ing heav­ily in surgery cen­tres, emer­gency rooms and ur­gent-care clin­ics. This ini­tia­tive is aimed at mak­ing sure es­tab­lished pri­vate hos­pi­tals don’t lose pa­tients, who are look­ing for more af­ford­able and con­ve­nient health care.

Share­hold­ers in day-clinic spe­cial­ist Ad­vanced Health might hope that trend takes hold in SA. The com­pany – fresh from a siz­able rights is­sue pitched at 130c/share — is limp­ing along at 71c.

I doubt the three ma­jor Jse-listed pri­vate hos­pi­tal groups would want to stitch up Ad­vanced, as all these com­pa­nies have the bal­ance sheet and acu­men to start their own day clinic-type ven­tures. But, in mo­ments of re­flec­tion, I have fan­ta­sised about what an ail­ing Ad­vanced might achieve if an ad­ven­tur­ous and value-adding in­vestor such as PSG Group or Hosken Con­sol­i­dated In­vest­ments were to take an in­ter­est.

I won­der if a se­ri­ously stretched fast-food counter such as Taste might not be un­der care­ful scru­tiny from Fa­mous Brands

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