Grand Pa­rade In­vest­ments

Financial Mail - Investors Monthly - - Contents - Marc Hasenfuss

Will Grand Pa­rade In­vest­ments (GPI) lose its flavour in the short term as the costs of rolling out its fledg­ling Burger King fast food fran­chise are in­curred?

In re­cent months the share price has drifted down from the 775c high recorded in Septem­ber last year. That was be­fore CEO Al­lan Keet ad­mit­ted at an in­vestor con­fer­ence in early De­cem­ber last year that the stated tar­get of 100 Burger King out­lets by end-June this year would be scaled back to pro­tect op­er­at­ing mar­gins (and pre­sum­ably mod­er­ate the devel­op­ment spend so as not to over­bur­den the bal­ance sheet).

A fur­ther com­pli­ca­tion is that the com­pe­ti­tion com­mis­sion has rec­om­mended pro­hibit­ing a deal in which Tsogo Sun would buy 40% of the GrandWest and Worces­ter casi­nos. GPI aided this trans­ac­tion by sell­ing its sig­nif­i­cant mi­nor­ity stake in th­ese casi­nos back to Sun In­ter­na­tional.

The con­cerns for in­vestors will re­volve mainly around the fund­ing of the Burger King . ex­pan­sion. At the time of writ­ing GPI had opened 34 Burger King out­lets (mainly in Cape Town and Jo­han­nes­burg with a hand­ful in Dur­ban). This should be con­sid­ered a fair ex­ten­sion of the brand re­mem­ber­ing that when the com­pany re­ported end-June year-end re­sults in late Au­gust there were 18 out­lets flip­ping burg­ers for long queues of cus­tomers. Should this pace con­tinue, GPI would have over 50 Burger King stores opened by the end of this fi­nan­cial year — though man­age­ment has in­di­cated the min­i­mum num­ber could be closer to 60 out­lets.

GPI’s an­nual re­port — which was still work­ing on the 100 store plan — noted that the steep roll-out plan for Burger King would in­cur cap­i­tal ex­pen­di­ture of around R350m in the fi­nan­cial year ahead.

The ques­tion is whether the de­lay in se­cur­ing pro­ceeds from the Sun In­ter­na­tional trans­ac­tion will hin­der the Burger King roll out? Prob­a­bly not. GPI has al­ready re­ceived the pro­ceeds from the sale of its limited pay­out ma­chine as­sets to Sun In­ter­na­tional. Th­ese, de­spite GPI re­cently declar­ing a 20c/share div­i­dend, should be suf­fi­cient to cover the im­me­di­ate cap­i­tal com­mit­ments for Burger King.

In a worst case sce­nario, GPI would re­tain its stakes in the cash-spin­ning casi­nos. Div­i­dend flows are re­li­able, and GPI could quite eas­ily lever­age th­ese hold­ings to se­cure longer-term fund­ing for Burger King, which by that time should it­self be dish­ing up solid cash flows.

All things con­sid­ered the mar­ket may be los­ing its ap­petite for GPI for all the wrong rea­sons. The com­pany is one of the few en­dur­ing em­pow­er­ment in­vest­ment coun­ters on the JSE, and needs to ad­here to con­ser­va­tive fis­cal man­age­ment strate­gies to re­tain its sta­tus (es­pe­cially among com­mu­nity share­hold­ers) as a re­li­able div­i­dend payer.

It is highly un­likely di­rec­tors would agree to gear GPI to the gills and ask share­hold­ers to forego pay­outs while the Burger King base was built.

With that in mind the de­ci­sion to rein in the Burger King ex­pan­sion tar­gets has more to do with pro­tect­ing the bal­ance sheet, the op­er­at­ing mar­gin and se­cur­ing fu­ture cash flows.

Cer­tainly a key con­sid­er­a­tion for pun­ters keen to nib­ble at GPI at cur­rent lev­els is the ma­ture mar­gin that Burger King might at­tain.

There is un­for­tu­nately not much to glean from GPI’s year to end-June re­sults when Burger King gen­er­ated sales of R127m and an op­er­at­ing loss of R108m.

The an­nual re­port noted that food mar­gins were tight, but in­di­cated that by lo­cal­is­ing the Burger King in­put, the mar­gins would re­set dur­ing the 2015 fi­nan­cial year. The bot­tom line is that Burger king will be in a breakeven po­si­tion at a store level by the end of 2015.

But more im­me­di­ate and more im­por­tantly will be the mar­gin progress in the up­com­ing in­terim re­sults to end-De­cem­ber. Let’s hope GPI will re­veal the mar­gins achieved on the hand­ful of older out­lets and con­firm there’s fat in re­lated cen­tral kitchen ven­tures, giv­ing in­vestors an inkling into whether the com­pany’s stated goal of a 60% mar­gin on Burger King is re­al­is­tic.

In that re­gard, Keet’s re­marks in De­cem­ber last year are worth not­ing: “We don’t want to roll out stores while the mar­gin is not right. We are 3% away from the cor­rect mar­gin, and should have the mar­gin right by the end of De­cem­ber. We will get to 56% by the end of De­cem­ber.”

IM is com­fort­able in rec­om­mend­ing GPI as a long-term buy, re­as­sured by the fact that GPI’s re­cent ac­qui­si­tion of a 10% stake in Spur Corp could pan out into a more com­pelling part­ner­ship.

A key con­sid­er­a­tion for pun­ters keen to nib­ble at GPI at cur­rent lev­els is the ma­ture mar­gin that Burger King might at­tain

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