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Grand Parade not taking a gamble

Retreats from gaming, more focus on food businesses.

Update: GPI announced on Friday that Alan Keet would step down from his post as executive director and CEO to head GPI’s Foods division as of March 20 2017.

Read: Grand Parade’s CEO resigns

Grand Parade Investments (GPI) has been exiting its gaming and leisure investments “on a limited basis” in the last six financial months, focusing its effort more on food investments.

This it says, is to reduce the risk of the gaming industry’s “onerous and changing” regulatory environment, as well as that of potential future taxes. However its hand is still in the game thanks to its mature investments, which have “strong annuity cash flows”.

During the six months ended December 31, GPI sold a 10% holding in SunWest International and Worcester Casino to Tsogo Sun and concluded a staged sale of 70% of GPI Slots to Sun International. “These sales were concluded at attractive multiples and have realised significant investment returns,” the company says.

GPI received R262.1 million in proceeds from the sale of 19.9% of GPI Slots and R547.5 million from the sale of 10% of SunWest and Worcester.

Meanwhile, GPI’s investments into food businesses continue.

Spur

GPI upped its effective holding in Spur to 11.6% (H1 2015: 10%) for R57.8 million, which it says “yields an attractive income annuity” without operating in a regulatory environment as onerous as that of gaming and leisure.

Since December 31 2016, GPI bought more Spur shares (for R52.7 million) and now has a 13.1% holding.

Dunkin’ Donuts and Baskin Robbins

It introduced five Dunkin’ Donuts restaurants (the first in October) and two Baskin Robbins (December) to the country, all in the Western Cape, which it said were well received, with sales exceeding initial targets in the first two months of trade.

In total, R13.7 million was spent on setting up and launching the brands.

Reportedly, Dunkin’ will open in Johannesburg in the first half of 2017 and there are plans in place to have 290 stores in South Africa in ten years, according to GPI CEO Alan Keet.

Read: Dunkin’ Donuts arrives in SA to challenge Krispy Kreme

The coffee and bakery chain reported sales of R11.2 million and a gross profit of R4 million for the period. The latter is well below GPI’s target, as the doughnuts were initially imported. GPI now plans to establish a doughnut production facility to localise production and reduce food cost.

Depreciation for the period was R0.8 million, resulting in an Ebit loss of R11.2 million.

Speciality ice cream store Baskin Robbins’ two stores made R0.9 million in revenue. Depreciation amounted to R0.2 million resulting in an Ebit loss of R5.8 million.

The terms of its South African Master Franchise licence requires GPI to open 71 corporate-owned Baskin-Robbins stores in the country over ten years.

GPI is confident the two brands will reach profitability much faster than Burger King did, by incorporating learnings from operating the burger franchise. “This will ensure that the earnings from its food investments will replace the earnings of the gaming and leisure investments, which have recently been sold,” the company said.

Burger King

Burger King reported a significant improvement in operating results with a 211% increase in restaurant Ebitda. Also, for the first time in its four years of operating, it achieved a profit at company Ebitda level, before restaurant closure costs.

Four new restaurants opened and two poor-performing restaurants closed. Twelve new drive-through restaurants are planned and GPI says its restaurant network will start gaining momentum over the next year, “which will ensure that a bottom line profit is attained”.

The numbers

For the interim period, basic earnings per share increased 25% to 7.07 cents, while headline earnings per share were down 59% to 0.84 cents.

Overall headline earnings were down R5.9 million more than the prior period. But, Burger King reported a R6.9 million improvement in its loss contribution, reporting an R8.7 million loss for the period (prior period: R15.6 million loss). The loss included once-off costs incurred to close non-performing restaurants.

Corporate costs for the period of R17.7 million were reduced by R7.6 million, when compared against the prior period’s costs of R25.3 million.

It repaid R281.2 million of debt cutting its debt equity ratio to 16.5%. Cash on hand increased to R347.3 million.

As far as investors are concerned, the PE is extremely high (425). However, a 2016 annual dividend of 25 cents per share was paid in December – 66.7% up from that of 2015.

Also, the company is buying back shares.

“GPI’s assessment of its intrinsic net asset value is significantly higher than its market capitalisation and as a result GPI repurchased 24.5 million shares during the period and a further 8.9 million shares subsequent to December 31 2016.

“The share repurchases will have the effect of increasing GPI’s earnings and dividends per share, but also highlights GPI’s confidence in the earnings potential of its food investments. GPI will continue to consider share repurchases as a mechanism to improve its return to shareholders,” the company said.

GPI says it plans to continue exiting its investments classified “non-core” in the previous financial year. It’s exited its investments in GrandLinkstate, Grand Sport and entered into an agreement with its investment partners in Grand Tellumat Manufacturing to limit its exposure to it.

The share price rose 0.56% on the day, closing at R3.57.

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Now if only Taste Holdings will get their act together. The trading update is late. How are those starbucks shops doing?

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