Company description: Simbisa Brands Limited is a Pan-African QSR operator, recently unbundled from Innscor Africa Limited through a distribution of the entire issued share capital of Simbisa to the shareholders of Innscor. Simbisa is in the business of selling fast foods through 388 outlets in 11 countries as at 31 August 2015.
Renewed and specific focus; promising times ahead?: Simbisa has undergone significant restructuring over the last two years including cost rationalisation through manpower optimisation, branch relocation and expansion. It has also undergone operational changes to improve productivity and efficiency (post FY2014) leading to margin improvement across the board in FY15. Given its strong presence in the Zimbabwean market, expanding branch network both in Zimbabwe and in the region (now 388) and positive cash flows, Simbisa is well poised to capitalise on opportunities for earnings growth. In our view, stream lining the company’s focus, core competencies, and enhancing of operational efficiencies would drive profitability going forward.
Wheels of growth in motion: Management says the unbundling and separate listing of Simbisa allows the business to gain direct access to capital markets and allow room for mergers and/or acquisitions of complementary businesses. The Group has been on a growth trajectory since 2011 and its revenue has a CAGR of 5% for the past 5 years. Comparative businesses in the region are recording double digit growth rates. Simbisa’s highest operating margins were achieved in FY11 when they were 11.50%, followed by FY12 when they were 10.56%, but this has been coming down over the years to 6.78% in FY15, which means the company does not have a sustainable competitive advantage. Similar businesses in the region have operating margins above 20% implying a significant head room for earnings growth for Simbisa. On a positive note Simbisa has very strong cash generating capabilities, having generated 9% of sales in FY15, but still below regional sector average of 20.6%. The Group has a net cash position of $3.7 million positioning the business to capitalise on organic and acquisitive growth opportunities as they arise.
Strong presence; increasing competition: Simbisa has a strong presence in the fast foods market but the segment has also attracted a lot of competitors due to low barriers to entry. Simbisa, however, offers a diversified product mix which includes fried chicken, French fries, pizza, ice cream and baked products, reducing product concentration risk and maintaining margins. The forecast for disposable income growth in the year ahead is conservative and continued uncertainty in the economic, political, and labour environments will weigh further on consumer confidence. In this context, growth in the forthcoming period is expected to be muted. However, we believe the group will continue to post positive results on the back of continued improvement in efficiencies and cost containment.
Risks to future growth: Infrastructure costs, food imports, and meat shortages might lead to high prices at many quick serve restaurants across Africa, and in the process affect customer count to restaurants as prices become higher than what most people can afford. Low commodity prices and weak currencies might also hinder the much anticipated growth of the middle class. The boom in most African economies was expected to create more consumers, but prospects have waned as growth has since slowed in most Sub Saharan Africa countries.
Valuation and View: Simbisa is the leading fast foods player in Zimbabwe with a wide and diversified product range. Given its brands and distribution strengths, it is well-placed to benefit from any economic turnaround in the country. Entry barriers into the sector are very low which means the company does not have a sustainable competitive advantage. However, we do believe the company has a strong balance sheet and financial muscle that will allow it to be competitive and dominant in the market. We estimate Simbisa to register revenue CAGR of 4% over FY16-20E. We assume Simbisa’s EBITDA to increase by a CAGR of 8% for the same period. EBITDA margins are likely to increase 300bp from 12% in FY16 to 15% in FY20. We place a ‘BUY’ rating on Simbisa with a target price of 19.31 cents, valuing the stock at 12.5x FY16E earnings and 8.13x FY16E EBITDA.
|Net interest expense||-726,726||-928,638||-752,302||-927,109||-919,155|
|Equity accounted earnings||93,594||101483||143,843||158,877||188,582|
|Profit before tax||12,858,001||13,866,365||10,142,004||8,066,759||9,661,578|
|Income tax expense||-2,789,036||-3,125,930||-2,174,244||-1,929,263||-2,148,936|
|Profit after taxation||10,068,965||10,740,435||7,967,760||6,137,496||7,512,642|