Iconic fast-food brand Burger King, it could be argued, is not getting a royal rating from local investors. The local Burger King franchise is 91% owned by empowerment company Grand Parade Investments (GPI), which has rolled out nearly 70 stores countrywide.
Admittedly, prevailing sentiment for big international eatery brands being rolled out in SA looks a little queasy. Taste Holdings is still looking some way off making sumptuous profits from pizza brand Domino’s and coffee-shop brand Starbucks.
Burger King is not yet also churning out profits, and GPI executives suggest real profitability will be apparent only in the year to end-June 2017. The store rollout has been lower than expected, but early indications are that margins will be relatively fat (somewhere between 55% and 60%) after a number of key inputs were "localised".
While GPI’s prospects are firmly hitched to Burger King, the actual valuation breakdown at the company may surprise a few punters.
As at the end of June, GPI’s remaining Sun International-aligned gaming investments — a 15.1% stake in the GrandWest casino in Cape Town, 15.1% of the Worcester casino and a 30% stake in limited payout machine (LPM) operator GrandSlots — were collectively valued at R1.4bn. I’d venture to say this valuation is solid, considering that we can gauge the performance of individual casinos in Sun International’s results, and the LPM valuation is referenced by recent transactions that led to GPI selling control of GrandSlots to Sun International.
The gaming investments are worth around 300c/share to GPI shareholders. But then you can also factor in the R562m due to GPI — in monthly instalments over the next three years — from Tsogo Sun, in exchange for strategic stakes in the GrandWest and Worcester casinos.
If this steady cash settlement is added back into the valuation of the gaming cluster, there is an effective 428c/share underpinning GPI’s official net asset value of 681c/share.
At the time of writing, GPI’s shares were trading at 360c. This suggests that prospective investors not only get the fast-food segment — Burger King, fledging endeavours Dunkin’ Donuts and Baskin-Robbins, as well as food services operations — for free, but also a rather attractive discount on the cash-spinning gaming investments. The official valuation on the food segment is R867m, or 186c/share. A further breakdown puts a R600m valuation on Burger King and roughly R200m on the food services businesses Mac Brothers and GF Meat Plant. The 10% empowerment stake in Spur Corp is valued at R66m — but obviously there is a much bigger strategic value if there is further corporate action down the line. I suspect the market’s lack of appetite for GPI stems from concerns that Burger King may take longer than predicted to serve up cash flows that justify the expense of rolling out the stores.
My gut feel is there is enough conservatism around the Burger King rollout to preclude expansionary indigestion. I also wouldn’t discount a deal that might lead to GPI reversing Burger King and other food operations into Spur Corp in exchange for a larger stake.
In fact, I can’t think of a better combination for an empowerment company — especially one that is determined to pay dividends to its shareholders — than Sun International-aligned gaming interests and Spur Corp.