Harare- Simbisa Brands, a local quick service restaurant brand, with a huge regional exposure and a listing on the ZSE, has announced a firm intention to acquire an international restaurant group once shareholders and regulatory approvals are secured. To date Simbisa had restricted its operations to the Sub Saharan Africa region where it operates 434 counters in 11 countries mainly in Zimbabwe which accounts for 45% of total counters or store . Its strong appetite for expansion can be traced back to 2015 when the company successfully unbundled from Innscor. Simbisa, then classified as Quick Service Restaurant segment within Innscor’s broader portfolio, controlled and still retains market leading brands such as Chicken Inn, Creamy Inn, Steers, Bakers Inn and Pizza Inn, which are very popular especially in the core market of Zimbabwe. As a value proposition in unbundling then, the company’s directors strongly argued that the move was likely to unlock significant value notably through acquisitions and mergers of entities in complimentary spheres coupled with other forms of expansions.

Over the past few years since its unbundling Simbisa has organically expanded coming from 388 restaurants in June 2015 to 419 restaurants in 2016 and 434 restaurants as at June 2017. Cumulatively the company has therefore added 46 counters over the period June 2015 to June 2017. As part of this organic growth in 2017 Simbisa opened 17 new counters in Kenya, 4 new counters in Zambia, 7 in Ghana, 2 in DRC and 13 in Mauritius, not factoring the number of stores closed in the same period within those markets. These new counters opened across the region are a very clear demonstration of the company’s appetite for expansion but given the illiquid nature of the local equity market in recent years and the punitive cost of local capital in the form of debt, such growth appetite could not be sustained. From within, the company’s cashflow analysis over the past 3 years since unbundling, shows that likewise the company cannot organically mutate in its quest for expansion. Since 2015, Simbisa’s has reported a negative free cashflow consistently which likewise diminishes the propensity to generate growth from within.

But the case for expansion can strongly be argued for using the profitability and restaurant growth data. Profit went up by 28% between 2016 and 2017 coming from a lower revenue growth of 8%. The most interesting static here is when we look at profit per counter which has grown phenomenally between 2016 and 2017 showing improved that newer counter have been more profitable. In 2016 the average counter posted a profit of $11600 which compares to a profit per counter of $14500 in 2017 a growth of 25% year on year. Given that revenue did not rise very strongly it goes to say, all else being equal, Simbisa has become more profitable with each new counters opened. The company has argued that it has closed down underperforming counters and sought newer locations based on clear study and this has helped redeem profitability. The acumen to locate prime profitable spots is therefore equally of paramount importance in this line of business and Simbisa has been getting better at satisfying this condition.

Based on this study of the company’s financial position, the local capital markets and the company’s income performance, it follows that expansion is indeed the right step towards unlocking value for Simbisa. Could there possibly be a better alternative to funding the expansion outside of the secondary listing in a more liquid market? There could be no better alternative imagined at this point and in any way equity would prove less costly to debt. That a target has been identified, in the case of Food Fund International, makes it even more appealing. Food Fund rides on strong brands notably the Meat Co, and over the past decade the company has grown its wings under the stewardship of Costa Tumazos, a renowned restaurateur in South Africa and now in the Middle East, boasting of 7 brands and operating 17 outlets. Although the total number of its restaurants looks relatively small to Simbisa, the business has been very profitable over the years. Its 17 outlets reported an average profit of $0.12 million each in 2017 which compares to Simbisa’s $14500 per counter profit. What this goes to show is that FFI operates in the high segment, while Simbisa operates in the middle to lower segment of the fast food market.

This dispersion gives Simbisa a clear-cut chance to diversify not only its geography where it has been restricted to Sub Sahara Africa, but also its market segments. The downswings in commodities over the past few years has hit Simbisa’s regional markets strong such as copper reliant DRC and Zambia. Other developments such as weakening regional currencies to the USD have likewise weighed on reported currency earnings from these regional markets. FFI has exposure in Europe, Middle East and Africa although predominantly retaining the Middle East as its anchor market which will help reduce geography exposure. On its part FFI under the younger Tumazos, has likewise been expanding its portfolio through own new brands and new counters which equates the 2 companies’ strategic thrust. Tumazos already have a great appreciation of Simbisa as he has been a non executive director since its unbundling. Simbisa is therefore likely to unlock value for the existing shareholders through the acquisition and further expansion from the capital raised through the secondary listing. The expansion drive should be however be guarded in the same manner as before to avoid shocks.

It is however not enough to conclude an investment move without considering the price shareholders have to pay in order to acquire the assets in question. It is no doubt FFI is a jewel and a promising business in the mid to long term, its ability to innovate, create coupled with its ability to have organically exponentially grown over the years, are a rarity that cannot be easily matched. But it is the right price that matters to the existing shareholder, for any such acquisition. Simbisa is expected to part away with shares valued at $40 million at full consummation of the deal which is subject to beating targeted profit levels. At an expected profit of $4.2 million in 2021, the implied Price Earnings Ratio at year 4 (PER+4) for FFI is 10 times which compares more favourably to a price earnings ratio of 16 times at which Simbisa was trading at, around the time the offer was tabled. However to achieve this profit level by 2021, FFI has to grow its bottom line at a compounded average growth rate of 14% per annum over the next 4 years which we also believe is beatable, making a strong case for acquisition. The multiples valuation used is the closest to fair value given that no much detail is given with regards to FFI’s historical financial performance.

Disclaimer : The Analyst has no direct or indirect interests in Simbisa’s shares.