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Robust flavours still dominate flow

Is franchise specialist Taste Holdings – which got a few punters champing at the bit after declaring a maiden dividend recently – a worthy alternative fast food/restaurant play to Famous Brands and Spur Corporation? Taste, which has spent the best part of two years trawling along under the 50c mark, spiked to a 30-month high of 104c earlier this month before drifting back to 82c/share.

With headline earnings of 10,2c/share posted for the year to end-February, Taste Holdings [JSE:TAS] is trading on a reasonable historic earnings multiple of around eight times. Spur’s historic earnings multiple is closer to 14 times, while the acquisition-hungry Famous Brands – the current market “flavourite’ – is edging towards 18 times.

The marked difference in the comparative earnings multiples probably explains the recent spurt in Taste’s share price. Indeed, at face value Taste looks a better value proposition than its more established franchise rivals.

However, Spur and Famous Brands have both earned their respective stripes in the market with consistently solid profit performances and generous dividend servings over many years. What has always impressed Finweek is that both Spur and Famous Brands generate heaps of cash. In Spur’s last interim reporting period cash generated by operations was R63m, or 71c/share, while Famous Brands generated R258m, or 268c/share, over its past financial year.

We might be forgiven for thinking Taste – which (let’s be honest) doesn’t have the brand power of either Spur or Famous Brands – wouldn’t match up in the “quality of earnings” stakes. However, Taste – which has jewellery franchising and retail adorning its traditional fast food core – also kicks out clods of cash flow. The company’s headline earnings of R18,3m (10,6c/share) is more than covered in its cash flow statement, which showed operational cash flow at R22m (equivalent 12,2c/share).

With earnings reassuringly backed up by cash flow, should investors then buy Taste as a cheaper alternative to Spur or Famous Brands? There are a few things to consider before drawing that conclusion.

Taste can’t match Spur’s balance sheet strength. Spur has R90m in cash (equivalent to more than 100c/share), which provides a reassuring back-up to the dividend policy should operations face a particularly tough year. Spur’s cash balance also means it can make fairly sizeable acquisitions (in fact, it announced a deal with Cappuccinos just last week) and there’s scope for share buybacks as well as special distributions to shareholders. So on a safety first and yield basis Finweek would still prefer to hold stock in Spur.

While Taste has performed admirably since its listing on the AltX, it simply doesn’t hold the brand diversification of Famous Brands. A decade ago Famous probably relied very heavily on its Steers franchise but has since built an array of brands across a handful of platforms that generate strong cash flows. The group has also shown an ability to expand smaller formats, which has kept the market enamoured with its growth potential.

Probably the biggest factor Taste doesn’t compete that well with Spur and Famous Brands is in generating a variety of income streams. A breakdown of Taste’s profit flows shows the bulk of its operating income is still coming from franchising (almost R35m). Both Spur and (especially) Famous Brands have chunky profits earned from franchise fees and manufacturing, with the latter also earning sizeable amounts from supply chain and logistics services.

We mentioned “brand power” earlier, but it’s worth pondering how compelling an acquisitive strategy Taste can hang on its current brands. You might well understand Spur and Famous Brands (with Steers and Wimpy in tow) might be the preferred choice for smaller fast food/restaurant operations seeking the sheltering wing of a corporate entity.

While we’re making it abundantly clear that Spur (this writer’s choice) and Famous Brands (colleague Bruce Whitfield’s choice) are what investors should tuck into as a main course, we’re certainly not turning down Taste by any means.

Taste is well managed, holds a rather impressive operating margin (go ahead: do the calculation), has a sturdy balance sheet and churns decent cash flows. Finweek believes even though Taste doesn’t have the imposing presence of its larger rivals, the company is well capable of surprising in building a viable franchise network (that may well evolve away from food). As such, ordering Taste as a side dish may not be such a bad idea.

Perhaps prospective investors should also stick to taking slow bites, because – as is the wont with recently listed small caps – initial market enthusiasm following the maiden dividend could wear off rather quickly and see Taste’s price at more attractive levels.

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