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Mark Ingham on MediClinic, Taste, Joffe-Hedderwick's new combo - and stocks they left
Mark Ingham on MediClinic, Taste, Joffe-Hedderwick's new combo - and stocks they left
Published Date: 2017-06-02 | Source: Biznews PM | Author: Alec Hogg
A wonderful freewheeling discussion on stocks with independent analyst Mark Ingham where the conversation flows from what he made of the money managers’ meeting with MediClinic’s top team through to an assessment of results from Famous Brands and Taste Holdings; and the million dollar question of whether the success enjoyed by Brian Joffe and Kevin Hedderwick would be repeated in their new JSE-listed business Long4Life – and what now to make of the companies they have left behind. – Alec Hogg
This special podcast is brought to you by EasyEquities and investment analyst, independent extraordinaire Mark Ingham is with us. Mark, good to have you as always. You've been flitting around the world, back home though last night to a presentation with MediClinic in Johannesburg to analysts, like yourself. It is a stock that I've got in my bundle on Easy. Did you find that there were reasons for me to be discouraged or encouraged by what you heard last night?
Alec, I think encouraged and I think your confidence in management and the business model is well founded. Indeed, MediClinic has been on my focus list too and it's a business that I'm happy to be exposed to. They're having some jitters in the last year or so around Brexit and funding in the Middle East. That switched around recently as well, so that co-payment issue is out of the way for the time being. I think the stock, from a London listing point of view, Alec, is probably still trying to find its feet. A fair amount of liquidity is going through the London market and we've seen the stock remarkably volatile in the last year but it's recovered quite nicely. I think if people look at the underlying fundamental aspects of the business. There's no reason for that stock to be cheap and I think at these sorts of levels it still offers relative value for new money and I think the take away from the meeting with analysts last night is that it's steady as it goes. The operations are performing to expectations, South Africa, and Swiss operations particularly, and in the lease operations, I think a work in progress but scope for margin enhancement over the coming years.
It's an interesting one because the MediClinic share price has been bouncing around quite a lot. The stock surging recently, and then coming back again. Is that a reflection of the Rand/Pound exchange rate perhaps?
I think, Alec, there was a certain element of the Brexit phenomenon that caused that. The co-payment situation in the Middle East too, I think also had a wobble because as a result of that we have seen volumes down 30% in that market. I think there will be a recovery now the co-payment is taken away. It won't be a B-shaped recovery, as Myburgh the finance director indicated. There's probably going to be more like a U-shaped recovery. But nonetheless that business is still nicely profitable. I think there are some learnings to be had from that market. It's rather different to what they're accustomed to, and I've pretty much taken the medium view anyway. On the MidEast, Alec and it doesn't take away from the investment case.
South Africa doing fairly well. Don't expect any new capital investment anytime soon but certainly extensions to existing facilities. Occupancy levels are over 70%, which is a very comfortable level, so I think we can look at not quite an ex-growth type of situation now in South Africa but certainly moving in line with inflation over the short to medium term. The Swiss operations I think surprisingly doing remarkably well. There's been one or two challenges there from a macro point of view, a regulatory point of view, and a funding point of view but the management are on top of that. These are excellently managed operations, good quality real estate and, so I think people being exposed to the stock shouldn't necessarily see it as a gross stock, as such. But certainly a business that can make comfortable progress, from an earnings point of view and, also paying out a reasonable dividend to shareholders.
I think the diversification that they've achieved off what is quite a strong balance sheet. They had raised equity in recent times. I think it's a very nicely balanced situation. Financially, fairly strong and I think certainly the learnings that they are gaining from the overseas markets and indeed the experience that they have in South Africa have travelled pretty well too. I think it gives them the opportunity, as time goes by and as financial circumstances dictate, they're going to possibly look at other geographies too.
Daniel Meintjes is an interesting chief executive. Do analysts warm to him?
I think so. What you see is what you get and he's a veteran of the company MediClinic, he also served time in a senior executive capacity in the Middle East, so he's familiar with that territory too. I think he has an extremely good grasp of his brief. I think from a leadership point of view he's very much there in front of the team. He's got a strong executive team, so you've got a solid CEO, but I think underlying that, from my experience, they've got some really excellent people in the different territories and in different roles, doing a good job. From a management depth point of view, I think investors can feel pretty comfortable.
So, stick with it. The lovely Rand hedge and getting their business right in the UAE, the Middle East. Famous Brands results were out earlier this week. Now, Kevin Hedderwick, moving on, joining Brian Joffe in an exciting new project listed on the JSE. We'll dwell on Kevin in a moment but Famous Brands itself, what did you make of those numbers?
I think a fairly, solid set of numbers there. There is debt on the balance sheet now, Alec, you will have seen and I think that the deal that they struck in the UK, the Gourmet Burger business, is actually performing very well for them. They aren't disappointed, by any stretch of the imagination. They did their homework, they bought a good business. It's performing well for them. Brexit is on everybody's lips at the moment but they're looking beyond that and there's some interesting learnings that are coming out of that. It's corporate owned stores. They can learn from and they are indeed already learning from the experience in Britain. I think that crosses both ways, so building on some well recognised brands in South Africa. Kevin Hedderwick I spoke to, he is moving on. He didn't last long in retirement, so joining Long4Life as the chief operating officer there, with Brian, so they'll be up to some very interesting things.
I think one has to be patient, insofar as that is concerned. It's cash at the moment. Interestingly on the JSE it's trading at a premium to cash, and I think that speaks to the fact that people are buying into the personalities involved in Long4Life. Their history, the legacy that they've left, insofar as Bidcorp and Bidvest is concerned and, also Famous Brands. I think it has been instrumental in really shaping that company over the last few years. It is at a premium rating. Indeed Bidcorp is at a premium rating too, and I think both of them deserve those ratings.
The Legendary Joffe is back with Long4Life, how I enjoy watching this man work. -- feeling excited
— Spoken Word King (@PossessedsoulSA) April 6, 2017
Insofar as Famous Brands is concerned - I think it's premature to call that an ex-growth stock, Alec. They've still got some exciting, new thoughts and the new CEO too, who's taken over from Kevin, a seamless transition and therefore I think that the company is in good hands. Darren Hele is the new CEO and he's got some interesting ideas of his own, supported of course by a very able, and competent team of people. Going forward, you're going to see this mix of franchised and corporate owned stores. I think with the successful acquisition in Britain, I think that will also give them the confidence to look at other opportunities abroad as well, of scale.
The challenge at the moment, I think Alec, is the balance sheet. I think a lot of investors and shareholders thought that it was time to leverage that balance sheet. The debt is essentially rand denominated but I think given that the cash flows that they generate out of the operations you should see that business grow steadily over the next while. From a balance sheet point of view, I'm not too concerned and therefore I think these latest results underscore that it's business as usual. Looking at new things and giving confidence to investors.
The two listed competitors that they have are Taste Holdings, whose results have come out and I'd be interested to get your view on those, and Spur, which seems to be hitting trouble about that video that came out. Now certain members of the community are saying, 'But show us the video of what happened to the kids, while the kids were fighting'. It kind of a beggar's belief that a playground spat can develop into something that could threaten, some say, the chief executive’s tenure there. Maybe we could start off with Spur and just get your views on what's happening there, given that Allen Ambor, the founder, has also sold pretty much his whole holding in the company.
Yes, I think Spur has also got a long history, dating from the late 1960's and I think in some respects, I think Allen was a pioneer in this area over the last few years. I think it has lagged its rival. The share price of late has language, although it's up very comfortably in the last 4 to 5 years. I think there are limits to growth there. I think it's a bit unfortunate that this recent incident has coloured what is basically, a good business but perhaps that also speaks to the socio-economic dynamics that we're facing in South Africa at the moment. I think, and you mention Taste as well. I've met with the management team also this week. Carlo and his team doing some very interesting things. I think what it shows though is that one size doesn't necessarily fit all, in the quick service restaurant arena. I think the achievements of Famous Brands underscore the fact that this isn't an easy business to be in but if you do get the formula right, there is tremendous opportunity.
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I think Famous Brands, particularly, has been quite astute at acquiring pretty well…Taste is in quite an interesting juxtaposition at the moment because Carlo and his management team did make a high conviction call on Starbucks and the pizza business. I think that the company is probably at a cross-roads at the current time. The Starbucks and Domino’s Pizza operations will be the focus of attention, going forward. For that you need balance sheets, Alec. I think given the cost associated with Starbucks particularly, just as a side it will cost you in the region of R10m to get a Starbucks, such as in the Mall of Africa up and running. And then there's quite a long lead-time, there's some quite rigorous training that needs to take place. You're also paying royalty fees to Starbucks in the United States. So, it takes a while to get up to cruising altitude and as a result of that the business from a food operations point of view at the moment is losing money.
The jewellery business is doing well, it makes about R60m Ebitda a year. They are in the process of having a capital raise, at the moment. There's a R120m that is underwritten. In addition, the jewellery business is up for sale and I think for the right buyer and at the right price, it will be a good asset in someone else's hands. This will then allow management to focus on the new trajectory. They'd pretty much say we're a 16-year-old business. It's a start-up once again and with R400m - R500m being realised from the jewellery business, and a R120m from the capital raised. It will give them the balance sheet necessary to deliver on that new trajectory. Hopefully, in the next 2 to 3 years, will start to see profits materialise, so I guess for current investors, Alec, it's a question of patience being the watchword.
Interesting that they're getting rid of or selling NWJ, which really has been the jewel in that crown for a long time without exaggerating issues, as you've just mentioned now. But Starbucks and Domino’s will take time to get going. If they do eventually, and I see that it's been taken seriously enough for Howard Schultz, the founder of Starbucks, actually to come over to South Africa to help them with the opening of the first couple of stores. He mentioned that in great detail in the commencement address at the Arizona University, so interesting to see that connection now being made, even at the very highest level. Carlo has done pretty well to snag that one, Mark, is that where the future going to lie, on these American brands and particularly those two big ones?
I think so, Alec. Not entirely because Taste will still have a couple of homegrown brands, which will be franchised. But these will be corporate owned stores, Starbucks particularly and that's the model pretty much and because of that there's a greater capital intensity associated with it, particularly at the outset. As I've mentioned, once they get up to cruising altitude they start to pay their way very well but you need reasonably deep pockets to go through that J-curve and to get the capital invested upfront.
Yes, the jewellery business, which includes Arthur Kaplan, strong positioning in their markets but I think given the cross-roads that the business is at they are presenting a sale opportunity for the right buyer of a business that's made good progress in the last few years and I think that should result in them getting a reasonably good multiple for the business. We'll see where that takes us. I think investors too are questioning it. Spur is pretty much a one product business and I think people who are interested in taking a view on Taste, are saying 'how does jewellery fit in with selling coffee?' So, it makes for an easier discussion, Alec, they can say we're a single minded, focused operation. This is what we do and certainly I think the in production of Starbucks and Domino's in to the South African market has gone down well. It's well patronised, they have a small footprint at the moment but it's a popular destination. What they call third places is quite evident where people see it almost as a hybrid between home and office. You get a certain amount of free wi-fi too, when you visit one of their stores for a cup of coffee. It's becoming a place to meet. It's a place where I think people feel comfortable. It's a quality, well known offering and you're bringing something into South Africa that has a proven pedigree and I think that shapes the thinking of Carlo and his team in taking a new look at Taste, where it's going, what it wants to offer, and hence that earlier comment I made, 16-years-old but effectively, a start-up again.
Mark, of the three, Spur, Taste, or Famous Brands, which would be your favourite right now?
I think both, if we just leave Taste and Spur to one side. I think Taste is quite different. Spur is probably steady as it goes. I'm sure this unfortunate incident will pass-by. It's not sufficient to undermine the economics of the business, I think and it is quite a popular offering, particularly with families. Taste now is going through a capital raise. There's a pending sale of the jewellery business and of course it's going to take time for the capital investment that's been made into Starbucks particularly, to realise returns. So that is very much a longer-term play. It's also not particularly liquid, Alec.
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So, if we're looking for a rather more liquid and larger market cap opportunities then really, there's very little other than Famous Brands. It is on a chunky multiple, there's no two ways about that, it's in the mid-20's or so. But I think it's a proven formula. It's travelling well and they're able to identify good assets as they've done in the UK. They're also very good at transmitting learnings from the different offerings that they have. So, of the three, Alec, I think Famous Brands is probably the one you would want to be exposed to.
Then just to close off with, Kevin Hedderwick, going across to work with Brian Joffe, is that an opportunity, in Long4Life, their new company?
Yes, Alec, I think if we look at the pedigree of these two individuals that speaks for itself. Brian celebrated his 70th birthday this week. He's a young 70 and an energetic 70. Kevin Hedderwick too, although he's just retired he's now going into a whole, new position that I think people who would be 20 or 30 years younger, would find daunting. So it just goes to show, Alec, I think in 60 years is the new 40, or perhaps 70 is the new 50, I'm not quite sure but these are guys who are happy to do, literally a start-up. They've got backing from institutional shareholders, Brian has put some of his own money in as well. At the moment it's a work in progress. There are certain rumours doing the rounds about one or two pending acquisitions. There is a consumer lifestyle focus to it too and that doesn't necessarily mean that that strategy won't evolve in time. Bidvest is a very good lesson for us there that it started out with Mervyn Chipkin and his business, Chipkin's, but it evolved it into a business over the following years that was into freight and financial services, and retailing motor cars. So watch this space, again patience is the watchword. There aren't any hard cash generating assets at the moment. There's cash on the balance sheet but there's a wealth of opportunity for them.
Brian has underscored the fact that this is going to be a South Africa focussed play and not an international play. He did make the point that when he started Bidvest, in 1998 or so, that the economy was in a rather poor position. The politics weren't good, but that didn't stop Bidvest from becoming the successful group that it is today, and Bidcorp being spun out of that, so a tremendous value accretion there, and I think people are actually looking at that and saying well we can hitch a ride for a second Bidvest, we've got two proven operators, who I think will work well together, Alec. Both companies are known for not being deeply centralised, for letting people have their head and running. As long as you're patient, I think it's one of those keepers. Buy it, put it in the bottom drawer and in a few years' time, you'll probably be better off.
And the gap that has been left? You've already spoken about Famous Brands, you're quite happy that that's in good hands. What about Joffe not being involved at Bidvest and Bidcorp any further?
Bidvest is going its own way now, and I think in its current phase of its business life cycle that's the right thing. You may see a difference compared to what the business was like with Brian's influence and certainly, it's commanding a good rating in the markets. I think shareholders of which approximately half are overseas, have confidence. It is difficult going the markets that they're in, they're largely a South African focussed business. The markets are weak, so earnings growth is going to be extremely difficult to come by but they are casting their net abroad too, and seeing what opportunities eventuate. There is scope for them to use the balance sheet to do that.
Bidcorp also, I think under very good leadership and I think Bernard and his team have a very good history, doing what they do. Brian increasingly, I think stepped back and allowed his lieutenants to do what they do well. It's still got that philosophy of decentralised, do what's right in the different territories, what's appropriate in those areas but also have group-wide learnings as well. Group-wide procurement too if it's feasible. It's still very much an owner/manager type culture and Bidcorp in fact, today trades at quite a nice premium over the historic Bidvest business. I think that also speaks to the fact that people see Bidcorp as a growth business with a proven track record, and which can roll out a very successful model into other territories too, so watch this space. I think we're going to see a few more announcements in the coming months, as to new businesses being acquired, new geographies being entered. So, I think both of those companies are well set. I think Brian felt quite comfortable, particularly from a Bidcorp point of view, he was executive chairman, I think he felt quite comfortable that it's in the right hands. He can step back now and he can move onto pastures new.
Mark Ingham, independent investment analyst and this special podcast was brought to you by EasyEquities.