Hot in the kitchen
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