Taste Holdings, one of South Africa’s largest quick service restaurant (QSR) franchisors, is reportedly facing financial difficulties, relying on relative new entrant to the market, Starbucks, to help lift it out of the doldrums. The franchisor owns several well-known food and luxury goods brands, including Starbucks, Domino’s Pizza and jewellery stores NWJ and Arthur Kaplan.
Taste Holdings indicated in October that its half-year results would report a smaller loss than the same period last year, Craig Pheiffer, chief investment strategist at Absa Stockbrokers and Portfolio Management highlighted. He added that the group only recently acquired the Starbucks brand and the rolling out of stores across Gauteng.
“There has been a significant investment into this brand including training, IT and marketing costs. The management expectation is that this sunk investment will bear fruit over time as more stores are rolled out and the brand gains traction locally and reaches scale. A similar scenario has played out with the Domino’s Pizza brand where an upfront investment is expected to be recouped over a number of years,” explained Pheiffer.
Taste Holdings’ results
Despite reporting relatively positive results in terms of growth within the business, Taste Holdings’ interim results revealed that the company has yet to break even with its Starbucks and Domino’s Pizza franchises.
In a SENS announcement released by Taste Holdings, it revealed: “The 15% increase in group core revenue for the period ended 31 August 2016 (“the current period” or “2016”) is attributable mainly to the stellar same-store sales increase in luxury goods of 25% over the prior period.”
It added: “Operating costs as a percentage of revenue in the food division increased to 49.9% (2015: 36.6%). Within the Food Division the corporate store operating cost margin improved markedly over the prior period and the distribution operating cost margin was unchanged. The margin increase is therefore attributable to costs in the franchise business that are related to building the senior teams in order to establishing Starbucks and Domino’s.
“The company uses core earnings before interest, taxation, depreciation and amortisation (“EBITDA”) as a key internal measure to evaluate performance; for peer group comparisons; for performance targets and to determine long-range planning. As expected, the core EBITDA loss for the current period was -R10 million (2015: profit R17.5 million), attributable wholly to the Food Division as it establishes Starbucks and Domino’s.”
Taste Holdings as an investment
Pheiffer explained that Taste Holdings is a micro-cap stock with a market capitalisation of just under R700 million.
“Given its small size, it is not a constituent of the FTSE/JSE All Share Index but a constituent of the FTSE/JSE Africa Fledgling Index. Market capitalisation is not necessarily an indication of a “good” or “bad” company but the very small size of the listed entity would put it into the speculative arena,” revealed Pheiffer.
There are two main competitors to Taste Holdings on the Johannesburg Stock Exchange (JSE). These are Grand Parade Investments which owns the long-term master franchise agreement for Burger King in South Africa and Famous Brands which includes brands such as Mugg & Bean, Wimpy, Tasha’s, Europa, Steers, Mythos, Fego Caffe, Vovo Telo, Debonairs Pizza, and Milky Lane. However, Pheiffer noted that competitors to Taste Holdings would include all QSRs (even those not listed on the JSE).
“Famous Brands is a R16 billion market cap stock with a strong history of earnings and share price performance. Grand Parade has a market cap of R1.8 billion but has numerous other assets in the gaming and hotel sectors which means it’s not strictly comparable,” said Pheiffer.
When it comes to choosing an investment, you have to understand the valuation of the company you are considering, this in turn is driven by earnings expectations, noted Pheiffer. “Potential investors must take a view on the sector and how it would perform in the forecast economic environment and then address specifically how the company will manage the environment and drive earnings growth. Taste has taken a big bet on the success of Starbucks and investors need to decide whether or not that bet will pay off in the longer term for Taste (and shareholders) to see the return on its significant investment.”
Pheiffer added: “Taste Holdings is too small for us to consider for our managed portfolios and we would prefer the likes of Famous Brands with its well-established track record in the QSR/consumer brands sector.”
