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How Simbisa’s aggressive expansion drive adds value

In 2016 the average counter posted a profit of $11 600 which compares to a profit per counter of $14 500 in 2017 — a growth of 25% year on year.

Although revenue did not rise very strongly in the period, it means that Simbisa has become more profitable with each new counter 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 of paramount importance in this line of business and Simbisa has been getting better at satisfying this condition.

Based on 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 — 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 $120 000 each in 2017 which compares more favourably to Simbisa’s $14 500 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-Saharan Africa, but also its market segments.

The downswings in commodities over the past few years has hit Simbisa’s regional markets 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 has likewise been expanding its portfolio through own new brands and new counters which equates the 2 companies’ strategic thrust.

Tumazos already has 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.

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