Tastes like indigestion

One wonders at what point global brands Starbucks* and Domino’s will start getting uncomfortable about their local “partner” Taste Holdings and their future in the SA market.

We have, by now, become accustomed to Taste’s disastrous trading updates and its habit of taking the begging bowl to shareholders.

How many rights issues is it now? Five, I think — the first of which was in August 2014.

Taste said its HEPS loss for the year would be between 40.6c/share and 43.1c/share. Given the number of shares in issue, the FY2018 loss will be between R366m and R388m.

It’s tough going in the fast-food sector. Sure, consumer confidence isn’t as depressed as it has been in the past two to three years but the outlook for the macroeconomy and household finances is only slightly more positive. When it comes to Taste though, that’s just part of the problem.

It is constantly running out of cash because it is funding the expansion of Starbucks and pizza chain Domino’s and it has had to deal with jittery bondholders. To tide it over, it shored up R398m in its latest rights issue, R273m of which went towards repaying term debt.

Remember that at one point Taste tried to sell its loss-making jewellery businesses NWJ and Arthur Kaplan but couldn’t find a willing buyer.

Two things quickly: in its latest rights issue (in January) minorities basically abandoned the Taste rights, taking up only 13.84% (R55m) of the issue, and New York-based hedge fund Riskowitz Value Fund (RVF) ended up taking the bulk of the unwanted rights issue, giving it and its Jse-listed affiliate, Conduit Capital, a combined stake in Taste of 66%. RVF still has the jewellery business earmarked for sale — this despite middling demand for luxury goods.

Vunani Securities analyst Anthony Clark — who has had an “avoid” on the counter since it hit 257c, and recommended avoiding all Taste’s rights issues — says that if RVF were not there as a 66% shareholder propping up Taste’s share price “to their own means” Taste would be in business rescue. He calculates around R720m of accumulated losses over the past three years, if you include the last trading update.

“Think on that number — R720m — in light of the capital raised to date to fund this folly [R1.06bn] and the current Taste Holdings market capitalisation,” he says.

Taste’s market cap is R514m, if you’re wondering. The share is trading at 65c, down 71.5% in the year to date.

e:

Iced caramel macchiato to go?

Though Taste management has never disclosed the terms of its Starbucks or Domino’s agreements, the royalty fees it pays or what it puts out to buy the local rights, there is precedent, in the case of both brands, for either exiting a market or buying out a local partner. At Taste’s interim results, the business recorded an operating loss of R73.3m, of which the food side lost R70.6m.

Taste needs to get its food division firstly to a cash breakeven and, ultimately, to an operating profit status.

It can only do this if it a) rolls out more stores; and b) the stores are actually profitable.

To do this, Taste will need more cash than it has.

By the way, the price tag for a new Starbucks store is roughly R6m and it takes R1.8m to set a Domino’s up.