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Taste Holdings (TAS) will be the stock in focus: (Price at time of writing: R0.95) : 12 October 2017
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Background and overview of Taste Holdings
Taste Holdings (TAS), dubbed by many as a mini Famous Brands, owns various restaurant and jewellery outlets and a few manufacturing plants. One cannot help but think their business model is based on the vertically integrated and very successful Famous Brands. Taste owns and franchise out various brands.
Their brands include:
Oh boy what a difference 15months make. We last reviewed and valued TAS 15 months ago and to be frank we were still pretty bullish on the stock. Hell we valued them at over R3 a share. But we have to admit that we got this one wrong big time. Their capital expenditure (capex) to get Scooters pizza outlets converted into Domino's pizzas and to get Starbucks off the ground in SA has essentially eaten away at all their cash. And their balance sheet looks flatter than the top of table mountain. Below our interactive technical analysis chart of TAS share price.
Their brands include:
- Zebro's
- Maxi's
- Domino's Pizza South Africa
- Starbucks South Africa
- The Fish and Chips Company
- Arthur Kaplan
- NWJ
- Worlds Finest Watches
Oh boy what a difference 15months make. We last reviewed and valued TAS 15 months ago and to be frank we were still pretty bullish on the stock. Hell we valued them at over R3 a share. But we have to admit that we got this one wrong big time. Their capital expenditure (capex) to get Scooters pizza outlets converted into Domino's pizzas and to get Starbucks off the ground in SA has essentially eaten away at all their cash. And their balance sheet looks flatter than the top of table mountain. Below our interactive technical analysis chart of TAS share price.
TASTE (TAS) Interactive Share Price Chart
It doesn't take much to realise that there is something seriously wrong with TAS when looking at the chart above. We discuss TAS financial results below.
Financial review:
In our last review of Taste we wrote the following: "There is not much to write home about in Taste's current financial results, as it skewed by significant costs incurred to set up Domino's Pizza (by converting their old Scooters Pizza outlets and St Elmo's outlets to Domino's Pizza outlets), Starbuck South Africa and two dough manufacturing plants to be used for Domino's South Africa. Total setup costs of Domino's South Africa cost Taste Holdings almost R63million. Currently 74 Domino's pizza outlets that has been rolled out over the last 16 months by Taste Holdings
For their 2016 financial year, the start up costs of Starbucks South Africa has amounted to just over R8million. This figure is expected to balloon in the new financial year as Starbucks SA is only being truly rolled out after 29 February 2016 for which these financial results are valid. "
Well the chickens have come home to roost. TAS will in all likelihood not survive without a cash injection for shareholders or taking on massive loans to finance their roll out of Domino's and Starbucks. Subdued consumer spending in both the food and beverages industry and the jewelry market combined with increasing costs of expansion and setting up of their brands have lead to the perfect storm for TAS. Adn it sure looks like a financial hurricane Irma smacked TAS.
For their 2016 financial year, the start up costs of Starbucks South Africa has amounted to just over R8million. This figure is expected to balloon in the new financial year as Starbucks SA is only being truly rolled out after 29 February 2016 for which these financial results are valid. "
Well the chickens have come home to roost. TAS will in all likelihood not survive without a cash injection for shareholders or taking on massive loans to finance their roll out of Domino's and Starbucks. Subdued consumer spending in both the food and beverages industry and the jewelry market combined with increasing costs of expansion and setting up of their brands have lead to the perfect storm for TAS. Adn it sure looks like a financial hurricane Irma smacked TAS.
Their results are such a disaster we dont think it warrants interactive graphics for its income statement or revenue from various divisions as the results of such wont say much. So below we will just highlight some of the main issues that TAS and TAS shareholders will face in the short to medium term.
So lets summarize the TAS results for readers:
Revenue dropped by 9% compared to the 6months ended period of the previous year from R529mil to R483mil. Taste said "The 9% decrease in group revenue for the current period is driven by the lower revenue in the Luxury Goods division. Luxury goods are cyclical and negatively influenced by macro-economic uncertainty in the country, relative Rand strength and disposable income. This division reported a 15% decrease in same-store sales on the back of a 25% increase in same-store sale in the prior period. The division ended the current period on 79 stores (2016: 83 stores). Revenue in the Food division decreased by 1% or R2.9 million after inter-segment eliminations. The Food revenue decrease is largely attributable to a decrease in distribution and royalty revenue commensurate with the sales decline in the locally-owned brands. Domino’s recorded a same- store sales increase of 1%, while the locally-owned brands recorded a decline of 8.6%. The Food division had 69 (six Starbucks, 63 Domino’s) corporate-owned stores (2016: 34 stores)"
Gross profit up by 4% , of which Taste said the following "Gross profit increased by R7.1 million or 4% over 2016. This is primarily due to having more corporate stores in the Food division which trade at higher margins than the group average, as well as margins in corporate stores improving from the prior period. Consequently, group gross profit margin increased to 43% (2016: 37.9%). Pleasingly, the Luxury Goods division margin percentage was unchanged for the current period."
Loss for the period: R65.9mil compared to a loss for the 6months of previous year of R34.3mil. This equates to a loss per share of 16c per share. Even worse than the 9.2c loss per share shown for the 6months of the previous period.
Cash generated from their operations were negative. All cashflow readings now will probably be skewed by massive capex roll outs to try and get as many Starbucks stores up and running. They have R85mil in cash, but that is largely due to them having raised R116mil from issuing shares during the period under review.
In summary the following comments were made by the Taste CEO: "Any operational gains made during the six months ended 31 August 2017 (“2017” or “the current year”) have been overshadowed by the brutal and sustained decline in consumer spending across almost all categories that the group trades in.
The improvements in labour, margin and costs were not enough to counter the sales decline, especially in the first quarter of the current period. We expected sales in the Luxury Goods division to decline. Luxury Goods are cyclical and follow consumer sentiment, the exchange rate and disposable income trends reasonably predictably. What we did not expect was the extent nor the speed of the decline in the first quarter of the current period. Having responded with increased marketing spend and even tighter controls, the second quarter of the current period showed materially better sales and profit performance in this division, which has continued into September.
While we expected the Food division to post an EBITDA loss for the period we have also concluded that there is an element of cyclicality to the quick service restaurants (“QSR”) segment also following consumer sentiment and disposable income. Brands trading in the lower income consumer segment have borne the brunt of the sales decline. Our efforts to improve the value proposition, combined with increased marketing spending, have been met with limited success and certainly have not been enough to counter the current sales cycle. Although not immune from the cycle, Domino’s and Starbucks performed acceptably during the period, with Dominos posting a 1% increase in same-store sales. Notwithstanding reported lower foot counts in malls Starbucks stores individually continue to perform above our 25% internal rate of return (“IRR”) hurdle. In April this year the group took the strategic decision to separate the Food and Luxury Goods divisions in the future. Having initiated a sale process it was soon evident that the timing of concluding a sale was not ideal. The group has therefore stopped the sale process and is focussing its attention, across both divisions, on the operational and tactical responses this environment necessitates."
Revenue dropped by 9% compared to the 6months ended period of the previous year from R529mil to R483mil. Taste said "The 9% decrease in group revenue for the current period is driven by the lower revenue in the Luxury Goods division. Luxury goods are cyclical and negatively influenced by macro-economic uncertainty in the country, relative Rand strength and disposable income. This division reported a 15% decrease in same-store sales on the back of a 25% increase in same-store sale in the prior period. The division ended the current period on 79 stores (2016: 83 stores). Revenue in the Food division decreased by 1% or R2.9 million after inter-segment eliminations. The Food revenue decrease is largely attributable to a decrease in distribution and royalty revenue commensurate with the sales decline in the locally-owned brands. Domino’s recorded a same- store sales increase of 1%, while the locally-owned brands recorded a decline of 8.6%. The Food division had 69 (six Starbucks, 63 Domino’s) corporate-owned stores (2016: 34 stores)"
Gross profit up by 4% , of which Taste said the following "Gross profit increased by R7.1 million or 4% over 2016. This is primarily due to having more corporate stores in the Food division which trade at higher margins than the group average, as well as margins in corporate stores improving from the prior period. Consequently, group gross profit margin increased to 43% (2016: 37.9%). Pleasingly, the Luxury Goods division margin percentage was unchanged for the current period."
Loss for the period: R65.9mil compared to a loss for the 6months of previous year of R34.3mil. This equates to a loss per share of 16c per share. Even worse than the 9.2c loss per share shown for the 6months of the previous period.
Cash generated from their operations were negative. All cashflow readings now will probably be skewed by massive capex roll outs to try and get as many Starbucks stores up and running. They have R85mil in cash, but that is largely due to them having raised R116mil from issuing shares during the period under review.
In summary the following comments were made by the Taste CEO: "Any operational gains made during the six months ended 31 August 2017 (“2017” or “the current year”) have been overshadowed by the brutal and sustained decline in consumer spending across almost all categories that the group trades in.
The improvements in labour, margin and costs were not enough to counter the sales decline, especially in the first quarter of the current period. We expected sales in the Luxury Goods division to decline. Luxury Goods are cyclical and follow consumer sentiment, the exchange rate and disposable income trends reasonably predictably. What we did not expect was the extent nor the speed of the decline in the first quarter of the current period. Having responded with increased marketing spend and even tighter controls, the second quarter of the current period showed materially better sales and profit performance in this division, which has continued into September.
While we expected the Food division to post an EBITDA loss for the period we have also concluded that there is an element of cyclicality to the quick service restaurants (“QSR”) segment also following consumer sentiment and disposable income. Brands trading in the lower income consumer segment have borne the brunt of the sales decline. Our efforts to improve the value proposition, combined with increased marketing spending, have been met with limited success and certainly have not been enough to counter the current sales cycle. Although not immune from the cycle, Domino’s and Starbucks performed acceptably during the period, with Dominos posting a 1% increase in same-store sales. Notwithstanding reported lower foot counts in malls Starbucks stores individually continue to perform above our 25% internal rate of return (“IRR”) hurdle. In April this year the group took the strategic decision to separate the Food and Luxury Goods divisions in the future. Having initiated a sale process it was soon evident that the timing of concluding a sale was not ideal. The group has therefore stopped the sale process and is focussing its attention, across both divisions, on the operational and tactical responses this environment necessitates."
Valuation:
While it is hard to place a valuation on TAS due to the amount of costs they are incurring to roll out their brands, one should remember that this will not carry on into perpetuity. This costs will come down and revenues and profits from their aggressive roll out of their brands will start to filter through. They have sole distribution/franchise rights on two very well known international brands (Domino's Pizza and Starbucks).
Based on TAS current financial results and its current brands its rolling out and planning to roll out, and with its weak balance sheet and declining revenue numbers we have no choice but to label TAS as an AVOID and we would not recommend buying the share right now, as TAS is sure to either take on more debt, or to come begging to shareholders for funds to continue funding their roll out of Starbucks and Domino's. Both of these choices will have a detrimental effect on shareholder value . The only thing we can value TAS on its the R4mil odd EBITDA of their jewelry division (which on a PE of 10 gives you R40mil (or under 10c a share), as well as their cash of R85mil which equates to just under 20c a share. Thus if we need to put a value on them now we would have to say their worth 30c a share.
Part of the reason TAS share price is struggling so much is due to the fact that it is impossibly hard to attach a value to Starbucks or Dominno's right now with their roll out and capex costs. Thus investors avoid it as they find it hard to make a valuation on the business and thats why its price is in the dumps. They might recover from this if Starbucks keeps on expanding and they are profitable, but it will be a very long hard slog for TAS and we feel there are a lot better shares out there right now that investors can put their money into.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
Based on TAS current financial results and its current brands its rolling out and planning to roll out, and with its weak balance sheet and declining revenue numbers we have no choice but to label TAS as an AVOID and we would not recommend buying the share right now, as TAS is sure to either take on more debt, or to come begging to shareholders for funds to continue funding their roll out of Starbucks and Domino's. Both of these choices will have a detrimental effect on shareholder value . The only thing we can value TAS on its the R4mil odd EBITDA of their jewelry division (which on a PE of 10 gives you R40mil (or under 10c a share), as well as their cash of R85mil which equates to just under 20c a share. Thus if we need to put a value on them now we would have to say their worth 30c a share.
Part of the reason TAS share price is struggling so much is due to the fact that it is impossibly hard to attach a value to Starbucks or Dominno's right now with their roll out and capex costs. Thus investors avoid it as they find it hard to make a valuation on the business and thats why its price is in the dumps. They might recover from this if Starbucks keeps on expanding and they are profitable, but it will be a very long hard slog for TAS and we feel there are a lot better shares out there right now that investors can put their money into.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.