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This popular share is like a deep dark pit for your money

by , 02 June 2017

With the success Famous Brands has had in the last decade scores of investors have flocked to similar ‘opportunities' in the food sector.

Taste Holdings was probably the most exciting of these opportunities.

It owned Scooters Pizza, and Maxi's.

And when the company announced it would acquire The Fish and Chip Co in October 2011, its share price started a boom from 150c, to 450c in 2013.

But since then the share price has languished.

And I don't see that changing soon…
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Taste is begging investors for R120 million to keep going
 
In the 2016 financial year, Taste made a R74 million loss.
 
Then, on 29 May 2017 the company announced results for the latest financial year. The total loss came in at R101 million. Its cash balance has fallen from R202 million in 2016 to R32 million today.
 
This comes as its roll out of Domino’s Pizza and Starbucks happened. The expenses of putting up new stores, and not making a profit from day one was massive.
 
But, to get its new franchise brands profitable, Taste has to roll out more of them.
 
It needs 120 Domino’s outlets for the brand to start making it money.
Yet, it only has 49 Domino’s stores at the moment.
 
It plans to reach 105 stores in 2017/2018. But that requires more cash. Which is why the company is asking investors for another R120 million to keep going.
 
It’s so desperate that it’s offering shares at 150c a share, whilst the share price was at 208c a share prior to the announcement.
 
The share price has already tanked to 180c, and I foresee further downside.

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Sales aren’t going nearly as well as they should be… 
 
Whilst Taste talks about a 7% increase in revenue as if it is proof that the business is growing, I am worried.
 
Considering its sales at stores, the picture is bleak.
 
In the last year, Taste’s Zebro businesses saw a 14% decrease in store sales.
 
Maxi’s store sales dropped by 0.5%.
 
Fortunately, the company’s Fish & Chip Co saw a paltry increase of 5.8% in its store sales.
 
Simply put, these stores aren’t even seeing inflation relation increases in their sales.
 
They are literally losing market share.
 
Taste is selling its best running business to focus on food
 
Taste also owns a luxury goods division, which operates Arthur Kaplan and NWJ jewellers.
 
Whilst the combination of these with its food businesses makes for a confusing company, they have also been the main reason why the company remained profitable in the last couple of years.
 
In fact, at the moment the luxury segment makes up for more revenue than food does in Taste…
 
After posting a same-store sales increase of 15% for the full year ended February 2016 and then a further 25% increase in same-stores sales for the six months ended August 2016, the division posted a further full year same-store sales increase of 5.4% for the 12 months ended February 2017.
 
Now the company said it would like to sell this division.
 
Sure, the cash would help to lower the debt it owes.
 
And it might help putting up a couple more stores for Domino’s and Starbucks.
 
But I’m not sure getting rid of the most profitable part of the business to pay for less profitable ones is a great idea.

Taste has issued too many shares – with too little growth…
 
Since 2011, Taste’s number of shares in issue have more than doubled.
 
That means, shareholders have been heavily diluted.
 
And then there’s the pending share issue right now as well. After this share issue, Taste will have around 450 million issued shares. That’s compared to 170 million issued shares back in 2011.
 
So for every share in existence back in 2011, Taste will have issued 1.64 new ones.
 
Whilst it looks like Taste has used the cash to grow that’s not entirely true.
 
In 2011 Taste had revenue of R233 million, with 170.16 million shares in issue. R1.37 revenue per share.
 
After the coming share issue, Taste will have R1.08 billion in revenue with 450 million shares in issue. That’s R2.40 revenue per share.
 
So, in six year’s Taste has only grown revenue by 74% on a per share basis.
 
In the same time Famous Brands grew revenue per share by 191%.
 
Now you tell me which company you want to invest in?
 
Here’s to unleashing real value
Francois Joubert



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