Grand Parade Investments gambles on fast foods
It’s hard to believe that it’s been almost five years since snaking queues heralded the opening of SA’s first Burger King store by Grand Parade Investments (GPI).
With R680m having already been spent on building the fast-food chain, profitability could be imminent.
The magic breakeven figure is about 80 stores. There are now 71, with 10 having been opened in GPI’s six months to December.
"We will be at 82-83 stores by the end of June," says GPI executive chairman Hassen Adams. "By the end of 2018 there should be about 100."
The stores, all corporate owned, come with price tags of about R6m for a drive-through and R5m for a conventional store.
GPI values Burger King at R827.6m.
Burger King came close to breakeven in GPI’s latest interim period, delivering a headline loss of R5.7m, down R2.6m (32%) from the same period in 2016. Sales performance was solid, lifting 15% to R317.6m, with like-for-like store sales up 4.5%.
Adams is enthusiastic about Burger King’s prospects.
"With 100 stores we will have annual sales of more than R1bn, " he says.
"This business will fly."
GPI’s move into the fast-food sector marked a radical departure from what had been its core business since its founding in 1997: casinos.
The shift away from gaming, explains Adams, was aimed at "de-risking" GPI and deploying its resources into ventures with better long-term growth prospects.
GPI made its most decisive move to reduce exposure to gaming in its year to June 2017, selling 19.9% of its stake in Sun Slots to Sun International for R262m and 10% each of its stakes in SunWest (GrandWest Casino in Cape Town is its key asset) and the Worcester Casino to Tsogo Sun for R675m.
GPI retains a 15.1% stake in SunWest, which it values at R866.6m, a 30% stake in Sun Slots valued at R676m and a 15.1% stake in the Worcester Casino valued at R31m.
The market has been far from enamoured with GPI’s radical strategy change.
It became even more sceptical when GPI extended its reach into fast food in 2016 when it added two other big-name US brands to its line-up: Dunkin’ Donuts and ice-cream purveyor Baskin-Robbins.
"[There is] investor unhappiness that quality gaming asset cash flow is being invested into so far loss-making fast-food assets," notes Anthony Clark of Vunani Securities in review of GPI’s interim results.
The market has shown its displeasure in no uncertain terms, wiping 70% off GPI’s share price in the past four years to where it is trading at a mere third of net asset value of R6.93.
GPI’s latest half-year results gave investors little reason to work up enthusiasm for GPI’s two latest fast-food ventures. With 11 stores open in Cape Town, Dunkin’ Donuts and its allied bakery turned in a R13.89m headline loss while Baskin-Robbins with five Cape Town stores lost R6.7m. It took their combined loss since 2016 to R62m.
GPI appears to have put further expansion of the two small fast-food operations on hold with Baskin-Robbins’ fate hanging in the balance.
"We may bring in a Saudi Arabian company as our partner in Baskin-Robbins or allow them to buy us out," says Adams. "They own Baskin-Robbins in Saudi Arabia, Bahrain and Australia."
For now, Donuts is staying.
"Once we are happy with it operationally we will probably move into Gauteng," says Adams.
But it seems GPI’s confidence in becoming what Adams just six months ago termed "a giant in the [fast-] food market", may have waned.
GPI could be on the verge of again increasing its gaming industry exposure.
Potentially paving the way is recently published draft legislation which, if enacted, would allow the transfer of two Western Province casino licences from smaller towns to the greater Cape Town area.
In GPI’s sights is the transfer of the Worcester Casino’s licence.
If the licence transfer goes ahead, GPI will consider participation in a new casino either in the V&A Waterfront or in the CBD.
"We would look at converting an existing building into a casino," says Adams.
"But it won’t happen any time soon. It could take up to two years."
GPI has attracted John Biccard, who holds a 5% stake in the Investec Value Fund he manages. "It is an incredibly cheap but much unloved stock," he says.
Cheap it appears to be.
GPI’s stakes in SunWest and Sun Slots combined are valued at R1.54bn, compared with its market cap of R1.1bn.
Sticking his neck out, Clark says he believes GPI’s share price has bottomed. Perhaps — but how long GPI’s share price will take to gain upside traction remains to be seen.