| 2020 | 2021 | ||||||
| Price: | 2.40 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 430 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 70 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 70 | TEV/EBIT | 0 | 0 | |||
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Grand Parade (GPL.JSE) is an investment holding company run by a new management team mandated by activist investors to sell all the assets to unlock the unacceptable holding company discount. Investors can expect an upside of over 80% with catalysts within a week and in January 2021.
MARKET STATS
Price R4.20
#share 429.5mil
Mcap 1 031mil
The SOTP value is R 1 913mil. Upside 86%.
SOTP VALUATION
The SOTP value is shown below
Equity
Burger King (95.78% owned) R488mil
Meat Plant (100%) R 18mil
Spur (7.8%) R 143mil
Grand West (15%) R 827mil
Sun Slots(30%) R 500mil
Property(100%) R 159mil
MacBrothers R 25mil
Cash (less 3yr opex) R 23mil
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Gross Assets R2 183mil
Debt (Grand West+slots) R 204mil
Debt (Property) R 53mil
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NAV R 1 926mil
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The above calculation has been extracted from the June 20 financial statements. I broadly agree with the valuation, except for MacBrothers which I value at zero. I also update the SPUR value to R155mil using the current share price. Adjusting for these differences my NAV is R1 913mil or R4.46 per share.
More details on these investments are provided below.
Burger King + Meat Plant (SOTP value = R506mil)
GPL owns the Burger King master franchise for South Africa. There are 97 stores generating R1bil in revenue.
The business has been sold to ECP (Emerging Capital Partners) for R506mil (R488mil + R18mil). ECP is a US based PE firm focused on African investments.
The Burger King negotiations started pre-Covid. The original purchase price was cut by 15% to reflect the uncertainty created by Covid. However, the original deal included profit warranties while the current deal is essentially a cash deal with 90% of the proceeds paid on closing.
The long-stop date for the transaction is 18 December 2020, next week. I have been in contact with GPL management who remain confident that the transaction will be concluded on time. Burger King has been trading well despite Covid with sales tracking 5% above last year.
Spur (SOTP valuation = R155mil)
(GPL own 8.448mil shares @ R18.40)
Spur is listed and is the franchisor of various established restaurant brands including steakhouse and pizza. Spur generated revenues of R760mil (June20), R944mil(June19), R891mil(June18) and R648mil(June17). EBITDA was R135mil, R257mil, R208mil and R212mil, respectively. The current EV is R1 500mil.
The current share price is R28.40, down from R34 pre-Covid. Spur is potentially a good recovery play. Restaurant sales for October were 92% of prior year sales showing a continuing recovery, July (36%), August (57%) and Sept (74%).
Grand West (SOTP value = R827mil)
GPL owns 15% of Grand West. Sun International (SUI.JSE)l, a listed casino operator, owns 62%.
Grand West is the only large casino in the Western Cape. It operates 2 563 slots and 75 tables. Grand West is a mature cash cow generating revenues of R1 800mil(June20), R2500mil(June19) and R2 525mil(June18). EBITDA was R516mil, R938mil and R947mil, respectively.
Casinos owned by Sun International are recovering from the Covid shock. July’s revenues were 33% of prior year revenue), August (48%), September (63%) and October (73%).
The R827mil used in the SOTP valuation implies an EV of R5.5bil for the business. That’s a 6.6 pe-Covid EV/EBITDA multiple which is not demanding especially when one takes the secret sauce into account. Sun International is heavily dependent on cash flows from Grand West to fund its other operations. As a result, Grand West pays out the majority of it’s free cash flow as a dividend. For the year ended June 2019,GPL received a dividend of R66mil from Grand West. Despite EBITDA falling 40% the 2020 dividend received declined marginally to R61mil.
A R60mil dividend on the R827mil SOTP equals a 7% yield and if this asset can not be sold are effectively paid to wait.
The natural buyer for Grand West is obviously Sun International especially as they need the cash flow from this cash cow.
Sun Slots (SOTP value = R500mil)
GPL owns 30% of Sun Slots. Sun International owns the remaining 70%.
Sun Slots operates Limited Payout Machines/Slots (LPM’s) typically located in bars and restaurants. Revenues generated of R989mil(June20), R1 200mil(June 19) and R1 118mil(June18). Ebitda of R235mil, R316mil and R262mil, respectively.
Like Grand West, Sun International needs this dividend. GPL received a dividend of R48mil in 2019 and R33mil in 2020.
The Covid recovery trajectory for Sun Slots is July(49% prior year revenue), August (73%), September (89%) and October (101%).
The latest guidance I have is that revenues are tracking 5% above last year. Somehow, LPM’s have been a beneficiary of Covid. Given the R500mil SOTP implies a 10% yield if the dividend recovers to R50mil.
Again, the natural buyer for Sun Slots is Sun International. GPL used to own 100% of Sun Slots and sold a 70% stake to Sun International. In August 2019, Sun International offered R504mil for the remaining 30% which some shareholders thought was too cheap. It did not matter, Covid sunk the deal. Sun International had very high debt levels going into Covid, and the deal was terminated as the SUI balance sheet was too stressed. Since then, Sun International raised R1.2bil in a rights offer and sold their South American operation for R2.5bil.
Property (SOTP = R159mil, Debt = R53mil)
Conditional offers have been made for these properties. I understand that there are other offers at slightly lower prices to fall back on if this offer fails.
Mac Brothers (SOTP = Nil)
Mac Brothers sells catering equipment to restaurants and bakeries. This has always been a marginal business and because of the restaurant trade has been hit so hard by Covid, I am cutting this value to zero.
Cash (SOTP = R23mil)
This is a cash balance after deducting three years of head office costs as explained by the following extract from the June 2020 annual report
“Management’s assessment of the NAV puts the value of the Group at R4.49 a share including an allowance for head office costs of R75 million (assuming a three-year wind-down)”
THOUGHTS ON THE LIQUIDATION PERIOD
Although the wind-down target is 3 years I am not brave enough to link my investment IRR to this timeline. As I discuss below, I expect a strong dividend from the gaming assets which will pay investors to wait.
The immediate risk is the sale of Burger King. Given the work I have done on this, I continue to build my initial position ahead of the December 18 long stop date. I think the stock should go up on the announcement as doubt is removed.
If the Burger King sale is confirmed, there will be another catalyst in January when the circular relating to the deal is published. The circular will contain details regarding the distribution of the R506mil proceeds. I expect R100mil to be retained to repay debt leaving R400mil (90c per share) to be distributed as a dividend. The announcement of the dividend may be the better risk-adjusted catalyst for more conservative investors. I plan to grow my initial position to a full position ahead of this catalyst.
Assuming a 90c distribution the economics become more attractive. Subtracting 90c from the share price (R2.40) and the nav (R4.46) implies that investors pay R1.50 for R3.56 of NAV, 137% upside.
Besides Burger King, the property sales seem likely, generating a 25c dividend. Also, Spur is listed and can easily be sold. Management want the share price to recover before selling. That’s another 30c to 50c dividend. Adding all the dividends, GPL shareholders will receive between R1.45 and R1.65 on their original R2.40 investment, implying an effective cost of 75c to 90c for the gaming assets.
The sale of the gaming assets depends on Covid and Sun International’s ability to make acquisitions. As I mentioned above, Sun International depends on dividends from these assets and these will continue to flow. The estimated dividend to GPL shareholders could be 25c per annum assuming a R60mil dividend from Grand West and R50mil from Sun Slots which is passed through without leakage. That’s at least 25% on the original investment net of the dividend received. More than enough to get paid while waiting.
As I write this, the uncertainty created by Covid makes me wonder if I am too optimistic. Yes, there are risks! On the other hand, listed casino stocks in South Africa are up 200% (TSG.JSE) and 55% (SUI.JSE) from their lows. I missed these runs and hopefully GPL allows me to play catch-up. Obviously, these listed casinos can be used to hedge a GPL long.
CATALYSTS AND RISKS
Success of the Burger King sale on the December 18.
Just in case the deal fails, and, you need to re-think the valuation case, Burger King made the following operating profits, R97mil (Jun20), R54mil(Jun19) and R23mil(June18).
FINAL THOUGHT
The current management team were appointed by activists shareholders following unhappiness with the old CEO. The current management team is a breath of fresh air and has a clear mandate to sell assets to unlock the discount. While this is the primary reason for the trade, the trade provides exposure to casino’s and restaurants which are ideal Covid recovery plays.
December 18, 2020: Finalise Burger King sale.
January 2021: Publication of Burger King circular with details on the dividend.
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