Gourmet Burger takes a bite out of Famous Brands profit
Almost R1.3bn wiped off its market cap after the disastrous trading update
Famous Brands had one of its worst day in years on Tuesday, crashing as much as 17% on the JSE — the steepest fall since June 2003, according to Bloomberg — before recovering to close 10.74% lower.
Almost R1.3bn was wiped off its market cap after a disastrous trading update revealed the extent to which 2016’s Gourmet Burger Kitchen acquisition — the biggest deal under former CEO Kevin Hedederwick — soured.
And analysts have warned that Famous Brands shares could fall further.
Imtiaz Suliman, portfolio manager at Sentio Capital, which sold its stake after the company’s earlier profit warning in August, said “if they’re going to come out with R1.70 in earnings for the half-year, it’s still trading on a 20 p:e [price:earnings], so there could be more downside”.
Investec Asset Management’s Andrew Joannou agreed. “I don’t think we’ve seen the end of the decline and we’re not buyers, purely because we don’t think it’s cheap enough.”
Besides battling a depressed economy in SA — although it said that trading conditions for the first half had been “satisfactory” — Famous Brands now has an expensive millstone around its neck in the form of Gourmet Burger Kitchen, for which it paid R2.1bn and which it funded using debt.
One analyst, who asked not to be named, even described the acquisition as a disaster.
“It looked expensive when they announced the deal, but maybe people thought it would make R70m in profit … instead they are going to make a R15m loss,” the analyst said.
Famous Brands attributes the loss to “the prevailing adverse trading environment in the UK”.
The company is also in hock for an interest bill of R138m — up from R8m for the 2016 period.
Headline earnings for the six months ended August are now expected to be between 54% and 63% lower.
Famous Brands has also warned that Gourmet Burger Kitchen is likely only to return to profitability in the next financial year, although it “remains optimistic that the operation will add value to the group in time”.
However, the purchase appears set to join the hall of infamy among South African corporates, many of which are desperate to find growing markets as SA flounders.
“A lot of capital gets destroyed by external acquisitions,” Joannou said. “People selling those [businesses] are doing it for a reason, so the odds are stacked against you.”
Suliman said: “South African companies don’t have a fantastic track record and that’s what the market is worried about.” He is also concerned about Gourmet Burger Kitchen’s model — described as “transformative” by Famous Brands — of corporate-owned, rather than franchised stores. This means the company is on the hook for capex of an average £1m per store.
In August, Famous Brands halved its expansion plan for Gourmet Burger Kitchen to two stores this financial year. Earlier in 2017, Famous Brands said that the deal “has served to diversify earnings, expand the group’s geographic footprint and up-weight its company-owned restaurant base”.
But analysts are worried that the burger market is highly contested in the UK.
“I was there in August and the burger concept is quite saturated,” Suliman said.
AlphaWealth small caps analyst Keith McLachlan said: “I suspect that this is going to be a sore spot for the group going forward for quite a while.”
Famous Brands shares have now lost 31% for the year to date. Its peers in the sector, Spur and Taste Holdings, have fallen 15% and 54%, respectively.