Swapping Dividends for Burgers

The big news is that the company is suspending the dividend for the time being, with all likelihood that they will resume in the next financial year. Whilst this may be a bummer for those who like the yield, they have traditionally been very generous with 1.3 to 1.35 times dividend cover, this is still a growth business. And added to that, they don’t like to leverage up too much, perhaps some hard lessons were learnt in the past”


To market to market to buy a fat pig Earnings. In the end that is all that we care for. I know that there is a local medium term budget speech tomorrow, I know that there is a US GDP read on Friday, for us here however, we breathe and eat and sleep earnings and the business of business. Give me twenty company releases over one economic release from a government organisation. You get my drift? A company can of course always put their best foot forward and may not always show you the ugly side, that is the analysts job.

To be subjective is incredibly hard. Sometimes one part of me thinks that of you have skin in the game you are likely to do a better job, i.e. ownership of the stock for self and clients, then you are more likely to drill harder. Some tend to think that it is the other way around. Sometimes when asked to comment on specific stocks that none of our clients own, I am less likely to hold the same interest.

OK, straight into the meat, I mean the vegetable stew from meat free Monday. Stocks as a collective here in Jozi yesterday fell away in the last hour to close the session flat. We were up for most of the day, losing all of the gains in the last hour of trade. Sigh. Commodity stocks slipped at the end of the day, AngloGold Ashanti and Anglo American at the top of the losers boards, NEPI and MTN at the top of the winners boards. Losers outnumbered winners marginally, stick that down in your markets lingo book, along with all sorts of other not so important information.

Across the seas and far away in New York, New York, stocks on Wall Street “responded” to earnings and mergers, excitement building that the earnings recession has bottomed. And this quarter is about to reveal that businesses are growing earnings again, after a 12-18 month period of iffiness. Excitement around mergers, AT&T gobbling up Time Warner for the distribution and the content is set to be a good thing. Entertainment folks, what a time to be alive when you can with an internet connection watch the old and the new.

That internet connection doesn’t even need to be yours! i.e. you can watch content no matter where you go in the world. Earnings, Microsoft continued to enjoy a lift from Mr. Market, the stock was up another two and one-quarter of a percent, Alphabet, Amazon and Apple all rising ahead of their earnings reports this week. The Dow lifted 0.43 percent, the broader market added nearly half a percent, whilst the nerds of NASDAQ tacked on one percent by the time the bell rang for the close. Without further ado, let us talk about some earnings related news from yesterday.


Company corner

MTN reported numbers for their nine months to end September. Rob Shuter is going to join earlier than previously thought. 13 March next year, which is still a long way away. I guess it cannot actually come sooner for current chief Phuthuma Nhleko. As he is quoted in the SENS, he continues to shift more and more responsibilities to both Stephen Van Coller (who is the Vice President of Mergers and Acquisitions, as well as Strategy) and Gunter Engling, the acting CFO. Nhleko has stuck in some “hard targets” for the 12, 18 and 24 months, with the first half of the next financial year set to reveal the results of these targets.

Group subscribers increased 0.9 percent quarter on quarter, that is a good thing, the base now stands at 234,7 million, across 22 different countries and territories. That is a whole lot of people. 29,7 million here in South Africa (a decline of half a percent), 60,5 million in Nigeria (an increase of 2.5 percent) and 47,8 million in Iran (up 1.1 percent). Those three countries, out of the 22, account for 138 of the 234.7 million, or nearly 59 percent of all subscribers. Other West and Central Africa (which includes Ivory Coast and Ghana, as well as Cameroon), has 47.6 million customers, or another 20 percent of the subscriber base. I must have missed the fact that large OPCO and old reporting methods have been replaced by regional reporting.

In terms of subscriber numbers and expectations, the group have revised to include nearly a million net subscribers for the year. ARPUs are very important, those are average revenue per user. For MTN Nigeria in Dollar terms, they have understandably plunged as a result of the currency being rubbished. Down 32 percent quarter on quarter. Whoa!

Check this out: “Voice and data traffic increased 1,8% and 142% respectively YoY” Data? WhatsApp, Facebook, YouTube, you get the drift. And notwithstanding the fact that global call rates are on the down, across their network it is plateaued for the time being. What I also find interesting is the following, this is here in South Africa: “Revenue improved by more than 3,6% QoQ while the EBITDA margin expanded by more than 200 bp QoQ.” Margins expanding and revenue on the up? That goes against recent “wisdom” here in South Africa, that is not what the chattering classes would have been putting forward.

Iran seems to be “getting better”, the group are able to repatriate monies out, which is more than just a positive development. They expect to have got all the money they need to out over the next six months. Nigeria is still nothing short of a lurch from problem to problem, politicians have suggested that the company improperly repatriated funds out over a decade, nearly 14 billion Dollars worth. As the release says: “Consequently MTN Nigeria will strongly defend any action that would be prejudicial to its interest.”

Data is the next big leap. What is quite interesting is that not all countries are the same, some countries like Ghana (41.7 percent of total revenues) and Iran (41.5 percent) are using more data per customer than South Africa (34.4 percent of total revenue) and even Cameroon (19 percent), who lag, as do Nigeria (20.4 percent). So different countries and their respective populations have different consumption patterns at a data level. Whether or not data will become commoditised remains to be seen, we all consume a whole lot more than we used to, streaming music and videos has become a way of life. More smartphones joining the networks will do more and more in time, consume more data. Whether or not the networks can balance the fine line between huge capex (MTN have invested 21.230 billion Rand over the last 9 months, an increase of 10.5 percent year on year) and charging the right rate, remains to be seen, I suspect that they will definitely pull this off. As more and more entertainment takes place on mobile devices, MTN will be a benefactor of this trend.

The stock has responded as you would expect, relief at some level that “things” are not as bad as the headlines. Nor are they great, Nigeria needs to somehow be stabilised (at least the bad news), the business in that country is currently in a state of “severe storm” that is being weathered. To this point. I suspect that a local listing and local ownership (in Nigeria) would go a long way to improving local sentiment to the company. The oil price and a stabilisation of all things Nigerian budget, well, stick that down in the category of cannot do anything about. Owning this business on the basis that data continues to supply internet, and will continue to do so, for millions of people across our continent.


Famous Brands delivered and served up six month results yesterday. At face value they are decent results, notwithstanding what is always a tough operating environment. The group have successfully transformed themselves into a food production business, along with the old core distribution and franchising front end. Production means that you can control the quality inside of the brands that you have acquired, something that becomes increasingly hard to do across multiple brands and many more stores. The group now has over 2600 stores of your good old favourites, and your new favourites too. The tried and tested Mugg & Bean to Debonairs, alongside the likes of Tashas. I mean, who do you know who doesn’t like Tashas?

Numbers quickly, revenues increased 23 percent to 2.45 billion Rand for the first half, operating profit (before exceptional items) increased 17 percent to 404 million Rand. Operating margins contracted as a result of higher internal investment to improve operations, as well as incorporating the lower margin production businesses. Making and selling cheese and meats to yourself is a lower margin business, it is more steady and about the controls. It has been a busy first half, with the acquisition of Salsa Mexican (damn delicious stuff), Lupa Osteria (anyone eaten there?) and of course the french fries spot, Lamberts Bay Foods.

The group also invested in a tomato paste facility, Cape Concentrate in Coega. For what it was built for, and never used, and for what Famous Brands got it for, genius. Since the half year has ended the group has also acquired just under half of By Word of Mouth Catering as well as landing the “big one”, Gourmet Burger Kitchen (see below). I used to fish with an old Norwegian ship captain (on a smallish boat relative to what he was used to) who was a little like Captain Ahab, always searching for a monster fish that managed to escape us. In his deep Norwegian accent he always used to refer to the “big one”.

The big news is that the company is suspending the dividend for the time being, with all likelihood that they will resume in the next financial year. Whilst this may be a bummer for those who like the yield, they have traditionally been very generous with 1.3 to 1.35 times dividend cover, this is still a growth business. And added to that, they don’t like to leverage up too much, perhaps some hard lessons were learnt in the past. It is difficult to believe that this business has been listed for around 25 years and that the history is nearly 50 years long.

Perhaps the family types who got 405 cents per share (less tax) have squirrelled more than enough for the next few years. It is pretty easy to work out, there are nearly 100 million shares in issue, if the company doesn’t pay 4 Rand a share, they “save” themselves 400 million Rand. That is less money they have to pay externally and more money to service the debt associated with the big transaction done in the UK. That is of course the Gourmet Burger Kitchen (GBK), which was acquired for the princely sum of 120 million Pound Sterling. 80 stores. You do the math, that is a “big number”.

GBK EBITDA for the last year was 9.6 million Pounds, they (Famous Brands) are paying 12.5 times EBITDA. For comparisons sake, Shake Shack (Yeah baby!!) had annual revenues of 224 million Dollars (183 million Pounds) with a similar store footprint, with 25.2 million Dollars EBITDA, the market cap is 1.21 billion Dollars. So …. the market in the US pays 4 times more for Shake Shack than Famous Brands paid for Gourmet Burger Kitchen. Obviously the one is Shake Shack and Mr. Market are expecting HUGE (You-J) things, the brand may be small, yet it gets high profile mentions. Shake Shack are set to get to 107 stores by the end of this current financial year.

The expansion plan for GBK will be local (in the UK) and then into Ireland (half of which is Europe), before heading off to the mainland. And I am pretty sure that the brand will land up here at some stage. I was talking to a fellow who is heavily invested through a private company in the food and beverage entertainment space (read restaurant and bar) here in South Africa, he suggested that the gourmet burger space here locally was saturated, he did say that RocoMamas had done a great job. Stop yourself, count the calories! Remembering that Spur own half of RocoMamas, you could say that it was the one that “got away” from Famous Brands. Steers could shake things up a little, have two separate brands I guess with gourmet shakes and burgers if they wanted.

And then lastly, Paul’s are set to open here (literally here in Melrose Arch) in late February. That is an exciting development, the bakery’s are incredibly delicious. I have seen and been to several in France, they have an amazing feel and look, so fresh and clean and freakin’ delicious. Again, don’t count the calories or you will get depressed. What to do with the stock? Hold it, even through the “no pay” zone, it is for good reason that the dividend is likely to be suspended all the way through next year and into the year after. Another big growth phase and consolidation is afoot!


Linkfest, lap it up

Another example of how things get distorted when Governments intervene in the natural workings of the market – Sugar shortage in Egypt leaves a bitter taste. The author makes a good point, it is the consumer who gets hurt at the end of the day.

Sometimes South Africans take for granted our liquid stock market and forex markets. This is not the case in many African countries – Even one of the world’s richest airlines may not be able to operate in Nigeria for much longer. Due to a highly restrictive currency market, countries are struggling to get money out of Nigeria.

There is a reason that Apple has a cult like following. Their products are just much more enjoyable to use – Macs are 3 times cheaper to own than Windows PCs, says IBM’s IT guy.

“Only 5% of IBM’s Mac employees needed help desk support versus 40% of PC users.”



Home again, home again, jiggety-jog. Visa results last night, the stock is off a touch after market with a “small beat” relative to the expectations. We will cover that tomorrow in full force. As well as one of the most highly anticipated results! Apple reports this evening after hours. Whoa, that is always thrilling and hugely exciting. Stocks across Asia are a mixed bag, some up and some down, stocks may open marginally firmer here.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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