GPI banks on Burger King as sugar tax, VAT hike and drought take their toll

Despite tough trading conditions - especially in its food businesses - taking their toll on Grand Parade Investments over the last six months, the group is banking on a strong continued sales performance from Burger King.

The group released its interim results on Monday. 

The increase in revenue from operations of 28% over the interim period was driven primarily by what the group calls "the impressive top line growth" in Burger King, which saw its total revenue for the year increase by 37%.

Even Burger King faced its share of headwinds, the group noted. "Despite the strong growth in revenue, the effects of higher raw material prices, sugar tax and the increase in VAT continued to erode overall margins," the group noted, with earnings before interest, taxes, depreciation and amortisation (EBITDA) for Burger King increasing by just R0.7m for the period, GPI said. 

However, the group anticipates continued high performance and plans to open another 15 Burger King outlets over the next three years. 

"The future expansion of Burger King will further improve bottom line profitability and allow volume discounts to be passed to Burger King which will improve overall gross profit margins. The change in focus over the last six months from growth to value creation has set a promising course for the group.

"GPI remains committed to executing the subsequent phases of the strategic plan which is to ultimately maximise total shareholder return," it said.

The sugar tax, the VAT increase from 14% to 15%, and the impact of the Western Cape drought all made their presence felt, with acting CEO Mohsin Tajbhai saying these factors had a continued negative impact on the food retail businesses.

GPI said income generated by the fast food sector decreased by 1.5% in the last quarter of 2018, which influenced the decision to exit non-performing Dunkin Donuts and Baskin Robbins, which had adversely affected earnings. 

"Whilst disappointing, it was the right decision for all stakeholders. We are now better positioned to focus our efforts and resources on the growth of Burger King," commented Tajbhai. "Furthermore, we are confident that the reduction in the cash drain on the business will improve future earnings."

Despite the tough trading conditions, GPI noted, nevertheless, that it had seen a 12% growth in its share price compared to the prior year.

At the same time the Group managed to drive down its central costs by 40%, excluding net finance charges, compared to the prior period. EBITDA increased by 12%.

GPI's gaming assets bolstered its headline earnings per share, which grew by 18%.

Basic earnings per share decreased by 11 cents compared to the previous year. A dividend was not declared.

Over the next six to twelve months GPI will continue to focus on improving efficiency and profitability in its operational businesses. 

"Our major initiatives include the disposal of Dunkin Donuts and Baskin Robbins, improving the profitability of Burger King through the relocation of poor performing restaurants, improving our capital structure through the sale of non-core assets and improving the profitability of Mac Brothers, which has been affected by the decline in both the construction and manufacturing sectors," said Tajbhai. 

Tale of two stories

Ricco Friedrich of Denker Capital told Fin24 that the GPI results reflect "a tale of two stories". On the one hand there was an improvement in gaming assets, while operating assets continued their poor performance.
"The closure of Baskin Robbins and Dunkin Donuts is the right decision, but this is just the beginning of the journey in closing or disposing of poor underperforming operating assets," said Friedrich.

"In our view management also needs to take some hard decisions around the bakery, meat plant and Mac Brothers. These businesses all generate very low returns on capital and should be closed or exited. In addition, the Spur investment holds very little merit."
Overall Friedrich is encouraged by the growth in Burger King's average revenue per store. He points out, however, that the progression in profits has been well below target, with ebitda margins of just 4%. He said this is due to a collapse in gross margins from 58% to 52%.

"I find this quite bizarre as running a global QSR brand like Burger King should be on a very tight ship and gross margins should never be compromised – it's a cookie cut formula. Management have always indicated they need to get to 60% gross margins – now they're back at 52%," commented Friedrich.
"We would also commend management's efforts in reducing central costs, although we would like to see this being sustained into the future." 

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