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Eclectic: Still some explaining to do

Some retail investor excitement but valuation appears stretched.

Stockbrokers who have spoken to Moneyweb over the last few days have commented that the potential listing of fast food and restaurant group Eclectic Brands has attracted a fair level of interest from retail clients but institutional investors are not convinced about the valuation of the group.

The restaurant group which owns popular brands like Burger Perfect, Pizza Perfect, Giovanni’s and The Slug & Lettuce, had indicated it would try to raise R175 million by listing on the JSE at the end of March 2015. Had the listing gone according to plan then the company would have had a market capitalisation of R490.7 million, according to FNB Securities.

Eclectic announced earlier this week that it had decided to postpone the listing, telling the market: “Following a review of the group’s strategy and positive market feedback received, the company has elected to postpone its listing date to enable it enough time to incorporate a pending acquisition of significance which will improve the offer. Eclectic Brands will then re-approach the market to raise the required capital to effect settlement of all acquired businesses.”

“I have to be honest – I’m a little surprised that the institutional investors haven’t been all over this one considering the success of businesses like Famous Brands and Taste Holdings,” commented one stockbroker to Moneyweb. He indicated that while there had been some interest from retail investors, the meatier commitments from larger institutional investors had not been forthcoming.

The first question which springs to mind when assessing Eclectic is this: Famous Brands, Spur Corporation, Grand Parade Investments and Taste Holdings have snapped almost any brands that have promise in the restaurant sector; what will Eclectic bring that the others don’t already offer?

For context, Spur recently acquired RocoMamas which has just four restaurants, Taste has brought Domino’s Pizza to South Africa and Grand Parade has taken a big punt on global giant Burger King.

The pre-listing prospectus for Eclectic is interesting. Its portfolio breaks down its 152 stores as follows:

Pizza Perfect 101
Burger Perfect 18
Chickin Tyme 6
Giovanni’s 1
Isabella’s 13
The Green Group 1
Slug & Lettuce 8
Harvard Café & Fly Boys 4

For the period to end February 2016, the group is targeting an operating profit of R44.1 million.

The group acknowledges that it will carry some IT costs in this number and will write-down about R2.6 million of intangibles but, assuming no store growth, that means that the average store will generate R291 030 in profit for the year or R24 177 per month. Solid but unspectacular businesses considering that the average Pizza Perfect will cost you R1 million to kit out in year one. This is not a perfect sum because the head office will be receiving a fixed marketing percentage and licence or royalty fee from the franchisees as well, but it does highlight that the business needs to do more to diversify its earnings base.

If one assumes that Eclectic values its portfolio of unlisted assets in a similar manner to the way it will value the listed assets, then the R44.1 million divided by the current valuation of R315 million – pre the listing cash being injected – gives you a price to earnings multiple of around 14 times earnings. While this compares favourably with its peer group – Famous Brands is trading at 25 times earnings while Taste Holdings trades around 22 times – the consensus seems to be that the group needs to be more than a group of franchise operators cobbled together.

Eclectic has indicated that it would like to make a sizeable investment into an acquisition which could plug into its supply chain and, for the moment, the decision not to list may be the correct one.

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