Yesterday after the market closed, Famous Brands released an ugly looking trading update. The main focus was on GBK, their recent acquisition in the UK. That business produced a loss of 872 000 pounds. Here is what they had to say about GBK.
"Disappointingly, GBK recorded a PBIT loss of GBP872 000 for the period. This loss is primarily attributable to the prevailing adverse trading environment in the UK, however, as noted in the update, the Board of Directors ("the Board") is confident that innovative interventions currently being implemented in the business by management will have a positive impact on future performance. These measures include intensified focus on the management of new restaurants opened, improving operational efficiencies, and enhancing cost controls - including curtailing the opening of further restaurants in the short term given the high pre-opening capital costs, averaging GBP1 million per store."
Another South African company hurting in the post Brexit British environment. The problem for Famous Brands is that they used to be debt free and a good dividend payer. After this acquisition they now have financing costs of R138 million. Usually an acquisition like this would at least be earnings accretive. GBK is making a loss.
Because of this, headline earnings per share are expected to be down between 54%-63%.
Famous Brands have an incredible track record at making restaurant chains successful. We should give management more time to implement what they set out to do when they made this acquisition. The stocks is down heavily today, we do not think it is a good idea to sell after a knee jerk reaction. Let's be patient here.