Picture: BLOOMBERG/PAUL YEUNG
Picture: BLOOMBERG/PAUL YEUNG

Investors have given Grand Parade Investments the benefit of the doubt that it will make good on its promises to release value trapped in the yawning valuation gap between its share price and underlying assets.

After being stuck in a narrow range since November 2020, the share price of Grand Parade, one of the pioneering BEE companies, picked up since the beginning of the year, rising as much as 13%. 

Now it is up to the executive team led by Mohsin Tajbhai to achieve what it set out to do in unlocking at least R500m value for shareholders that include the Public Investment Corporation, the custodian of R2-trillion government employee pensions.

Founded in 1998 as the BEE partner for casino and hotels giant Sun International, Grand Parade looked beyond casino and gaming boundaries to become an investor in the fast-food industry after acquiring a franchise licence to run the Burger King chain in SA, and buying a stake in diner Spur Corporation.

But the value of underlying assets, the intrinsic net asset value in corporate finance parlance, is at a nearly 40% premium to its share price, which at R2.70 per share late on Wednesday afternoon, values the company at R1.2bn.  

It’s not extraordinary for investment holding companies to trade at a discount to asset value, but the acceptable shortfall is usually 15%-20%.  

Grand Parade is also not the only SA company grappling with this valuation problem. The most striking example in recent years is Naspers, Africa’s biggest company that owed its more than a R1-trillion market capitalisation to a one-third stake in China’s Tencent, despite Naspers owning other multibillion-rand assets, including stakes in fast-growing internet platforms in India, Brazil and Russia.

Valuation mismatch

Naspers tried to solve that problem by spinning off and separately listing MultiChoice, seeking a listing of its international arm in Europe and most recently pledging to shower investors with money via share buybacks. Whether that is working is a different debate.  

Grand Parade’s Tajbhai also acknowledges that he cannot twiddle his thumbs when investors can easily walk off with a windfall locked away in one of the country’s most visible valuation mismatches.

As a first step, Grand Parade sold the Burger King franchise for R570m — a discount of nearly a fifth  to what it paid in 2012 when it had been betting on a post-2008 economic recovery that never materialised under the former president Jacob Zuma disastrous stewardship.

But the price is more than 20 times Burger King’s earnings before interest, tax, depreciation and amortisation (ebitda) in 2020, when the measure of underlying profit almost halved after Covid-19 lockdowns.  

And with just more than 90 restaurants — far fewer than its closest rival, McDonalds — much of Grand Parade’s profits from its other lucrative assets in the gaming and casino industry could have been squandered rolling out additional stores to become a meaningful player in the fast-food industry.

The company also signalled plans to offload Mac Brothers, the wholly owned manufacturer of catering equipment such as pizza ovens, bread slicers and doughnut fryers that had a rough 2020 as the pandemic-induced lockdown restrictions wreaked havoc. .  

In an economy not expected to return to prepandemic levels soon, there would have been costly pitfalls had it decided to hold on to its food division, especially the Burger King franchise.

Grand Parade has also made progress in offloading its property portfolios, including its head office in central Cape Town, its N1 City Building and Epping Circle.  

Grand Parade ultimately would get rid of the food segment that swung into a loss and emerge as a focused gaming and casino investments company, which has GrandWest, the only casino in Cape Town, as one of its major assets.

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