When the doughing gets tough...

Cape Town - The market has not exactly been salivating over food franchisor Taste Holdings, which listed on the AltX recently.

With most market attention reserved for well established players like Spur Corporation and Famous Brands it seems Taste, which owns the Maxis and Scooters brands, has at best been relegated to a side order.

Observers also felt the fast food sector in SA was looking over-traded, making if difficult for niche brands to spin meaningful profits. Hence Taste's shares drifted well below the 90c/share offer price in the pre-listing share placement in June this year.

But interim numbers to end August 2006 - released on Thursday - suggest Taste may warrant a closer look.

The top line showed encouraging growth with revenue up 40% to R15m and pre-tax profits coming in at R5.6m - a fat trading margin of over 37%.

Encouraging cash flow position

Headline earnings came in at 3c/share, which suggests that on an annualised (and presuming a stronger second half) Taste could comfortably beat its forecast full year earnings of 6.3c/share.

More heartening is that Taste more than matched its profits in the all important cash flow statement. Cash flows from operating activities were almost R9m - equivalent to about 7c/share. Cash on hand at the end of the interim period was almost R30m - or 24c/share.

The cash flow position is encouraging, and should ease any fretting about the inflated R17m reflected in "trade and other payables" on Taste's balance sheet.

The increase in trade and payables is understandable considering Taste's expansion in store base, and reflects the group's upfront payments for fixtures and fittings. The figure no doubt also reflects Taste's advertising spend, which Fin24 understands runs at R3m per month across both the Maxis and Scooters brand.

Demand for new franchises

CEO Carlo Gonzaga reported that a strong performance at store level was fuelling demand for new franchises and the group "was experiencing its highest demand to date in this area".

Gonzaga said the interim period represented the eighth consecutive quarter of positive real growth for Taste.

During the period 16 new Scooters pizza outlets were added, which saw total system sales increasing 46%. Gonzaga said this increase at Scooters was a result of new outlets added and organic growth in like-for-like sales of 17%.

Maxis, which opened 12 new stores in the interim period, is undergoing an extensive revamp. Gonzaga reckoned the brand had the potential to reach over 200 outlets in SA.

He said that the group's target of opening 30 new outlets in the full financial year would be exceeded with 22 new outlets already opened and with 35 prepaid franchisees awaiting sites countrywide.

Acquisition opportunities

Ultimately, it's still early days for Taste - and readers will no doubt remember that small fast food/restaurant players (remember O'Hagans?) can develop serious indigestion after promising starts.

One of the big questions is whether Taste can bring aboard new brands to diversify its operating base in the short to medium term.

Gonzaga said numerous consolidation opportunities still existed for the acquisition of further brands.

With Taste managing strong cash flows one has to wonder whether there is potential for the group to start dividend payments if no suitable acquisitions are secured in the short term.

Gonzaga discounted the dividend suggestion. "We could pay a dividend - but our objective is to grow the business, and we are talking to a lot of people."