No Pain, No Gain: Our Man's Portfolio: Burger King move is success on a plate for Gowrings
Wednesday 07 April 1999
Last month it quietly sold the remaining six franchised branches of Rocco's Pizza for an undisclosed, but clearly small, amount. The whole pizza venture appeared to be an embarrassing mistake. The garage operation is still the major business although the Burger King side is catching up fast.
Last year the garage and fast food combination produced profits of pounds 1.4m. This year Alan Millar, at stockbroker Greig Middleton, is shooting for pounds 2m. If he is right Gowrings shares look undervalued and an ideal candidate for my fledgling portfolio. At 103.5p the company is capitalised at only pounds 9.2m; last year the shares touched 132.5p.
A profits to capitalisation ratio is not, perhaps, the conventional way of judging the merits of a company's shares, but it is, nevertheless, a realistic one. On Mr Millar's profits estimate, Gowrings is selling on prospective earnings of just over seven with a dividend yield of 4.1 per cent. The shares should, I believe, enjoy a higher rating. They are a casualty of the stock market's still disrespectful attitude towards small companies and its disenchantment with conglomerates.
There is clear evidence that in market terms small cap shares are staging a comeback. As I pointed out last week, the new FTSE All Small index is up more than 15 per cent this year. And Gowrings is by no means a true conglomerate. Although cars and fast foods have no obvious links, it is a combination that has raised the conglomerate spectre. Throw in a tiny training business, Media First, and Gowrings begins to have that rag-bag look which unsettled investors, making the Hanson, BTR and (still) Tomkins of this world so unfashionable.
But the market has got it wrong and should come to realise that Gowrings is merely two unrelated businesses; it is, in fact, nothing like an old- fashioned conglomerate.
The company still has a large family shareholding with chairman John Fowles the biggest single shareholder with 12.8 per cent. But Guinness Peat, the City gunslinger, is sitting in there with 11.8 per cent. It has made takeover noises and is believed to favour the group splitting itself into two stand-alone companies - cars and fast foods.
Whether a break-up at such a small company would enhance shareholder value is debatable. In a few years, as the fast food side grows, a demerger might have more merit.
Still GP, one of the more aggressive City investors, has an ability to make things happen. Its very presence on the share register is further evidence there is value to be unlocked. It has had some success at other small quoted companies although it ran into a brick wall when it attempted to change the capital structure at Young & Co's Brewery.
Currently Burger King, part of the Diageo spirits giant, has about 500 outlets, against the 900 under the rival McDonald's banner. It plans to open 70 branches a year.
Gowrings has said it wants to open at least 21 in the Midlands in the next three years. The Burger King opening schedule offers the main operators, such as Gowrings as well as Granada (the biggest with 130), Compass (50) and Allied Leisure (40), plenty to feast on.
The garage side is unlikely to grow as quickly as the burger business. But acquisitions are being sought. Besides running main dealerships the group has scored through its bodyshops.
They generally offer higher margins than new and used car sales and, as their customers are mainly insurance groups, the cash flow has a gilt- edged ring.
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