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Ugodre: Is it time to dump my investment in fast food companies?

By on April 25, 2012

In almost every street corner in Lagos and major cities in Nigeria, there is  fast food restaurant. From Mr Biggs to Sweet Sensation to KFC to Chicken Republic etc they are everywhere. Just walk into any of them at peak periods between 12noon to 2pm and you may not get a sit. Go back a few hours later at 8pm and you may not get food to eat because the shelves are empty. Certainly, this guys are getting a lot of patronage which ultimately result to cash. But does this cash transcend to Profit??

The only way one can know if these guys make profit for their shareholders is to look at their financial statements. Unfortunately, only a handful of them are quoted companies making it difficult to analyse them in their entirety. The quoted ones should however serve as a guide as to whether they are making money or not at least theoretically. Like a opined in an earlier blog post, the food business in Nigeria is highly competitive as the barrier to new entrants is quite low. The Fastfood business also face this same problem.

A look at Tantalizers Annual Report for 2008-2011 reveal a startling idea of just how unprofitable these businesses are. Tantalizers for example have made revenues of not less that N4.5b over the years. However, most of it is eaten up by huge cost of sales and admin expenses both taking an average 54% and 45% from revenue respectively . This leave’s the company with little or no operational profit before interest and tax making the business model a cyclical drag on profits. Bigtreat also share a similar trait with an even worse result. In 2009, cost of sale of N2.5b took a huge chunk out of their Revenue of N4.2b with operation cost and interest eating up the rest, leaving a loss position of N441m. Even UAC the owners of Mr Biggs show very low profit margins. Their 2010 revenue of N34b only yielded profit before tax of about N2b (less than 10%).

Could it just be competition ripping into their profits or is just the inability of their management to reign down on cost? Tantalizers for example have a staff strength of over 2000 with salaries and wages taken up about N693m and N648m for 2009 and 2010 respectively. Another cause may also be the huge depreciation cost that these companies incur year after year. With some of them owning Fixed Assets with book values of over N6b its not inconceivable to

understand why their depreciation cost can go as high as N400m every year alone, a whopping 10% of their revenue. Thats probably why interest on loans isn’t so much of an issue as these cost are only accounting profit so do not represent cash payments. A look at their operating cashflows buttresses just that. Tantalizers in 2010 had Operating Cashflows of N654m alone in that year. However, it purchased fixed assets of over N700m in that same year. As such they will have to write off huge depreciation cost year after year from their profits before paying dividends.

Ironically, the little money these fast food companies make come mostly from business not directly associated with the selling food. For example, Big Treat made N34m from rental of its properties in 2008 and another N16m from other sources. UAC made a profit of N4b on its Real Estate business in 2010 alone. Tantalizers, the only one of them with a currently released financials has mostly relied on other income to remain profitable. it made N159m and N140m in 2009 and 2010 respectively on other income with rent making up N130m and N114m of that revenue in 2009 and 2010 respectively. 2011 is also not any difference as they made N113m in other income.

This sadly, doesn’t offer comfort to any serious shareholder as increased returns on shareholders funds is no more than a pipe dream. Tantalizers have in the last couple of years declared a paltry 2kobo only on a nominal share price of 50kobo only, a meagre 4% compared to other sectors that yield over 100% of nominal price. Would I hold on to the shares if I had one? My answer surely is anything but in the affirmative as I do not see any trend suggesting a concrete plan to reduce cost.

Ugodre Obi-Chukwu is a Chartered Accountant with over 10 years experience in Financial Management, Treasury, Tax, Corporate Finance and Financial Modeling. He blogs at, you can follow him on twitter @ugodre