We take a bite into Taste Holdings

Justmoney journalist, Danielle Van Wyk, takes a look at the franchise specialist investment group behind some of our favourite fast food brands, Taste Holdings.

Food appears to be Taste Holdings’ speciality - it rakes in around half of its revenue through well-known brands such as Scooters Pizza, St Elmo’s, Maxi’s, The Fish and Chip Co. and Zebro’s.

“The luxury goods division contributes the remaining 50% of revenue housing brands such as Arthur Kaplan, NWJ and the World’s Finest Watches,” stated Stefan du Toit at PSG Wealth Durbanville.

Taste Holdings has been aggressively adding quality international brands to its portfolio through exclusive licensing agreements. “As a result, Domino’s Pizza, a global brand and leader in pizza delivery and e-commerce, was opened in South Africa during 2015 and the first Starbucks Coffee store opened its doors in Rosebank during April 2016. As at year end, the Dominos Brand had 74 stores, with the Starbucks roll out in full swing. The company plans to open 12 to 15 more Starbucks stores within the next 12 months,” added du Toit.

Was international brand incorporation a good move?

Since the introduction of both the Starbucks and Dominoes brands, it has been less than easy going for the group.

“The share price is down over three years by approximately 35%, with the share price 14% lower for 2016 so far. The roll out of franchises requires significant capital which will subsequently have a negative impact on underlying earnings. Although these are well known international brands, from a South African perspective the initial outlay needs to be translated into significant earnings growth before there will be any meaningful recovery in the share price,” added du Toit.

It can take time for some international brands to get a foothold on South African soil. But once they do, we can’t seem to get enough of them. “McDonalds is a great example of the kind of success an international brand can achieve, having struggled when they launched they are now found in the most remote little towns in SA.

I definitely think that it was a great move by Taste to incorporate these brands into their group. I particularly like their portfolio, the company also has a luxury goods division which offers brands like Cartier and Montblanc, making it a nicely diversified portfolio,” added Paul Khweyane from Trade and Research for The Purple Group Limited.

Competition

The competition in the fast food market is stiff, with big names like Famous Brands (who remains the top contender in this category) and Spur Corporation Ltd, to name a few, constantly competing for market favour.

“Taste Holdings has a market cap of less than R1 billion, while its bigger counterpart and main competitor, Famous Brands, with a market cap of R12,5 billion, is well diversified housing quality brands such as Steers, Debonairs, Wimpy, Mugg & Bean, Tashas, House of Coffees and Wakaberry,” explained du Toit.

Performance

The group is currently operating at significantly lower margins than industry average and this is set to continue as the group expands.

“The roll out costs associated with Dominos were higher than initially anticipated, as a substantial number of stores were closed during the process of converting Scooters and St. Elmo’s to Dominos. The Dominos roll out was also very aggressive, not allowing the company to implement sufficient systems and controls. As a result, the Starbucks roll out will be done at a much slower pace, with the necessary systems being implemented across the network to ensure efficient and profitable operations,” said du Toit.

Investing in Taste

The likelihood that there will be a significant share price appreciation before a clear indication that the addition of the international brands can be translated into meaningful earnings growth, is slim.

Expanding with a foreign brand currently could not have come at a worse time either.

“If there is an uptick in the South African consumer environment, it will definitely be a positive development for Taste as they roll out more stores. The probability of this happening is, however, not very high as the South Africa economy is expected to grow by less than 1% during 2016 and 2017. Adding to this is a South African consumer that will be increasingly under pressure as the economy struggles with record high unemployment, especially for the youth, and rising petrol and food prices pushing inflation higher, which will eventually lead to more rate hikes,” said du Toit.

Khweyane added, that when looking to invest in this type of business, the following are key questions to address:

1. Portfolio composition: What brands do they have within their group? How are or will these brands be received?

2. Is the sector which the group operates within in its growth phase or is it matured?

3. What is the growth or expansion plan for the group? 

What to expect?

Despite aggressive rollouts and phase in and lower earnings in the last few years, the foundation has now been laid and lessons learnt with the incorporation of global brands.

“The platform has now been laid and it will be important for the company to focus on unlocking efficiencies within the business that will add long term value to shareholders. The phasing and timing of store roll outs will be critical over the next couple of months. The management seems upbeat about the future prospects as the Starbucks roll out seems to be running smoothly, but at the end of the day it is underlying earnings that talk and drive share prices,” du Toit stated.

He however also expressed concern at the recent decision taken by ex-investor – Brimstone formerly owned 15 % stake in Taste... “Citing factors such as the time frame and capital required for the roll out of Starbucks, Brimstone sold their shares. As these projects take time to become cash flow positive, Brimstone felt they can do better with their capital over the short to medium term in other investments. 

“With the current state of the South African economy and the competitive industry that Taste and Famous Brands operate in, it is important to focus on quality companies with well established brands,” said du Toit.