SHARE WATCH: Fast food industry in crisis

Nederburg Braai Day

Cape Town - The South African fast food industry has come under severe pressure of late. The management of these fast food retailers keep telling us that in an economy that is not growing as it should, making money is becoming increasingly harder.

These companies should also acknowledge that increased competition in the South African market is becoming ever more prevalent. Recent entrants into the markets include chains such as Chesa Nyama and Pizza Perfect.

Famous Brands [JSE:FBR]

Famous Brands, who owns household brands Steers, Wimpy and Debonairs among others, has seen its share price drop over 40% over the last year. The biggest reason is that investors are extremely negative on their Gourmet Burger Kitchen (GBK) acquisition in the UK. Having paid R2.1bn for GBK, the expectation is for GBK to contribute considerably to bottom line earnings.

Unfortunately, the opposite has happened. GBK only made a profit of R16m before interest and taxation. Management has cited reasons such as investor uncertainty due to Brexit. However, the fast food competition in the UK has also intensified and growing market share is becoming increasingly harder.

Taste [JSE:TAS]

Taste Holdings owns the fast food brands Dominos Pizza, Starbucks and Zebro's. Outside of food, Taste also has jewellery interest in NWJ, Arthur Kaplan and World's Finest Watches.

Taste has been trying to become profitable and hopes that the international brands of Starbucks will do exactly that.

For the six months ending August 2017, Taste posted a loss of around R65m. Unfortunately, Starbucks has not yet pulled Taste into profit. Worse yet, Taste's jewellery division, which has historically made profits, has also posted a loss of R769 000.

Taste needs to turn profitable as the balance sheet is very weak. With debts relatively high, Taste might consider issuing rights to bolster their cash position as the Starbucks roll-out is very cash hungry.

The share price of Taste declined from R2.15 in May to 75 cents recently.

Grand Parade Investments [JSE:GPL]

Recently Grand Parade announced that it withheld dividend payments for 2017. As with Taste, Grand Parade is still rolling out its Burger King, Dunkin’ Donuts and Baskin-Robbins stores. These roll-outs are very capital intensive and are still leading to company losses.

Grand Parade has a profitable gambling interest but is planning to disinvest from those in time as it targets food to be the future of the company.

In March 2017 Grand Parade Investments was trading at R4.00 per share. Currently, the price is trading at R2.71. This is a great entry point for investors as the company is actively deleveraging its balance sheet and has a debt to equity ratio of 16.8%.

Spur [JSE:SUR]

Spur has been a South African household name for years. As all of the other fast food chains, Spur has seen its share price drop considerably. It traded down from R36 per share to around R28 in less than a year. Recent numbers show like for like sales down 9.9% and headline earnings from continued operations declined by 26%.

Spur's roll-out of the RocoMamas franchise has been extremely successful and has been a great hedge for Spur in a declining environment. RocoMamas increased profits by 34%.

Other brands in the Spur group include Hussar Grill and John Dory's.

Woolworths [JSE:WHL]

Although not as much fast food, Woolies does offer customers a sit-down and take-away option. The Woolies share price seems to have found some support around the R60 level with investors buying the share a lot cheaper than they did 2 years ago. In November 2016, Woolies was trading at around R104 per share.

Like Famous Brands, Woolworths tried to achieve scale by entering an offshore market. The David Jones acquisition in Australia is providing problems with reported management differences and questions over the price paid for the acquisition.

However, Woolworths does sell superior products to its competitors and will rocket when the South African economy turns and the Australian acquisition gets bedded down properly.

Do you agree with Kirk's stock suggestion? Send us yours and tell us why.

*Kirk Swart is an analyst at Overberg Asset Management, an Authorised Financial Services Provider (No 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer: The above article does not constitute financial advice and is not a recommendation. Investors must always seek the advice of professionals and trade with caution. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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