Africa's largest branded food service franchisor Famous Brands’ share price took a hammering on the JSE yesterday, shedding more than 14 percent in early trade after the group released a disappointing trading update on Monday.
The stock dropped to R99.50 yesterday morning, down from the closing price of R118 on Monday, as the company said its UK acquisition Gourmet Burger King (GBK) was going to show a loss of R16million for the six months to end-August.
The shares eventually closed 10.74percent lower on the JSE at R105.50. Industry analysts blamed the GBK forecast for the negative sentiment as Famous Brand spent R2.1billion to acquire the franchise last year.
Shmuel Simpson, an analyst at 36One Asset Management, said GBK was finding it difficult to make its mark in the competitive UK burger market. He said that diversification could often lead to overpaying and entering a market without fully understanding the local dynamics.
“Management’s curtailing of the store roll-out is also indicative of the market saturation within this category,” Simpson said. “It seems like they got in at the peak of the cycle and clearly overpaid for the asset.” The group also reported that profits for the six months to end August had fallen by more than half.
Mergence Investment Managers’ investment analyst Nolwandle Mthombeni said the trading update painted a picture of significant deterioration in the financial performance of the Gourmet Burger chain. Mthombeni said the GBK was to blame as the South African portfolio performed in line with expectation.
“The previous trading update indicated top-line growth and so a loss on the GBK operations was not expected,” Mthombeni said, adding that the acquisition was already out of favour with the market, due to the purchase price paid and debt burden that accompanied it.
She said investors were now taking it badly that the overpriced acquisition was significantly under-performing.
“It seems management bit more off than they could chew,” she said. Famous Brands has shed 59.18percent in one year alone and debt servicing costs have also escalated from R8m to R138m. Jordan Weir, an equities trader at BayHill Capital, said Famous Brands overstretched itself in acquisitions.
Weir said while GBK was still a fresh working-addition to the Famous Brands empire, the weak economic environment on the ground in the UK did not help sales for the company during the pertinent 22-week period, with consumers holding back on “unnecessary” spending. He said GBK was meant to help the company with its evolution into a more consistently profit-making business in the foreseeable future, given certain historic inefficiencies that might have caused a slight drag on the bottom line.
“Also, there is the possibility that the ‘hand crafted’ burger trend may be slowing, as the consumer increasingly seeks a healthier lifestyle,” he said.
- BUSINESS REPORT