Gold Brands listing is a mixed bag

The figures point to a great value proposition but some analysts are not convinced.

Franchising company Gold Brands Investments listed on the JSE Alt-X on Friday in a move that will see the company broadening its global footprint. In keeping with JSE tradition, the company’s executive team beat the ceremonial drum as trading went live.

Bullish investors will have lost quite a bit as the stock tanked 84% after opening trades fell from R2 per share and to R1.12 within a matter of hours. Compared with the issue price of R1 per share, however, the share was up on the day. Vunani Securities’ small and medium caps analyst said in a review note released on Friday morning, that he would not invest his own money in Gold Brands. This is in spite of the pre-listing statement, which forecasted that the company would generate headline earnings per share of 8.02 cents per share to deliver a 12.5x price-earnings ratio in 2016.

“I simply don’t like the low-end fast food sector which is battling, as the major fast food companies have attested of late, and now in the height of this maelstrom we’re expected to back a new entrant,” said Clark. “(Gold Brands is) listing at possibly the worst time as the sector trades at new lows. There is too much risk here for me even on a 12.5x PE.

Nevertheless, Gold Brands’ chief operating officer Stelio Nathanael was in cheerful spirits saying the listing, through which the company was able to raise R25 million, would be used mainly for the expansion of its flagship franchise Chesanyama. The brand has been a remarkable success since it was launched in 2012, with 300 stores and 3 000 jobs created nationwide. The company plans to have 400 stores by year-end.

“The Chesanyama brand has grown from bringing R33 million in in-store sales in December 2014, to R56 million in December 2015,” said Nathanael. “In a downward economy towards the end of last year we saw an increase in December trades of 70% in the Chesanyama brands alone.”

Alpha Wealth’s small-cap fund manager Keith McLachlan said that, while he does not have a thorough understanding of the Global Brands business, he is wary of the quick-service restaurant space at the moment. He explains that the inflationary environment is likely to hit the company on the cost side, while its core customers – who are in the lower-to-mid LSM bracket – are also going to be feeling the pinch.

“The lower LSMs are likely to have less discretionary income,” said McLachlan, “and at the same time they will be facing competition from much bigger brands. It appears to have headwinds against the [the slowing economy], so there may be company-specific and operation-specific things that give it an advantage. Because the best companies are the ones that are created in tough environments.”

Rather buy Spur

Clark said the fast food segment is struggling with many of the main fast-food stocks “trading at 52-week lows recently as investors abandon [them], as they fear tougher earnings times ahead, driven by weaker sales, increasing food cost inflation and rising sector competition.” He said that unlike Gold Brands, which has limited initial capital and an Ebitda of R12 million, the bigger players have proven track records and economies of scales to navigate the challenging environment.

Says Clark: “If I wanted to invest in the fast food sector now my choice would be, and has been for a while, Spur Corporation. Granted the counter trades on a 50% higher rating than Gold Brands, but I’m happy to pay for the comfort of conservative and experienced management and a strong balance sheet with an innate ability to grow across many platforms.”

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So what is happening with this company ? Apparently not paying rent and salaries at some of their Chesa Nyama and 1 + 1 Pizza stores

End of comments.

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