Although Premier Capital plc and Simonds Farsons Cisk plc are companies with very different business models, one can group them within the food and beverage sector. Premier Capital plc operates in the quick service restaurant sector, while Simonds Farsons Cisk plc is a pure food and beverage company. Moreover, the companies operate in different geographic regions. Premier Capital plc has numerous McDonald’s restaurants in Estonia, Greece, Latvia, Lithuania, Malta and Romania. On the other hand, Farsons is largely dependent on the Maltese economy despite the improvements registered in recent years in exports with consistent volumes dispatched to various countries around the world.
Premier Capital had a portfolio of 156 restaurants as at December 31, 2019, with the large majority situated in Romania, and a significant amount of the company’s profits is generated from this important market. In fact, the acquisition of 90 per cent of the company operating the portfolio of restaurants in Romania in early 2016 transformed the fortunes of Premier Capital.
Prior to the purchase of the restaurant portfolio in Romania, overall revenue of Premier Capital amounted to €100 million with a pre-tax profit of just €1.7m. Meanwhile, subsequent to the acquisition in Romania, Premier’s revenue climbed from €263 million in 2017 to €341m in 2019 and pre-tax profits grew from just under €20m in 2017 to €28m in 2019.
On August 25, Premier Capital published an updated Financial Analysis Summary providing forecasts and projections for 2020 and also 2021. In 2020, revenues are anticipated to drop by 4.6 per cent to €325.6 million due to the impact of COVID-19 since, during the first half of 2020, all restaurants were either closed or provided reduced service through take away, McDrive and McDelivery only. The company, however, reported that Romania is recovering well and expectations are that the turnover level from their largest market will reach circa 96 per cent of the level generated in 2019. Revenue from Romania is expected to amount to €182.8 million in 2020, accounting for 56 per cent of overall revenue. During 2020, EBITDA is expected to decline by 17.3 per cent to €46.5 million and pre-tax profits are anticipated to total €15.7m compared to €28m in 2019.
The company expects total revenues to rise by 11.7 per cent in 2021 to a new record of €363.7 million, largely driven by growth in sales in Romania (+14.4 per cent to €209.2m), Greece (+17.3 per cent to €47.4m) and Lithuania (+8 per cent to €32m). The higher revenue is expected to translate into a 17 per cent growth in EBITDA to €54.4 million with pre-tax profits reaching €21.4m in 2021.
In view of the substantial lease commitments, the adoption of IFRS 16 had a significant impact on the financial statements of the company. In fact, out of the total debt of €205.4 million anticipated as at the end of 2020, lease liabilities amount to €89.6m. Prior to the adoption of IFRS 16, lease liabilities were not accounted for within the total debt. This led to a higher gearing ratio being reported in recent years reaching 75.3 per cent in 2019 and expected to rise to 81.4 per cent in 2020 before easing to the 80 per cent level as at December 31, 2021.
However, when analysing the leverage of the company from a net debt to EBITDA multiple, this is expected to remain very strong despite the impact of COVID-19. In fact, although the net debt to EBITDA is expected to weaken to 3.6 times in the 2020 financial year from 2.5 times in 2019, it is then expected to improve to 3.4 times in 2021. This essentially implies that the net debt of the company can be repaid in a period of less than four years. Likewise, the interest cover is expected to drop to 6.4 times in the 2020 financial year (FY2019: 9 times) before improving to 6.7 times in the 2021 financial year.
Premier aims to continue growing its portfolio of restaurants reaching a total of 218 by the end of 2026. Meanwhile, the company had announced that it intended to issue another €20 million bond with the main aim of financing the acquisition of the 10 per cent non-controlling interest held by the minority shareholder of the company operating the Romanian restaurants. However, this was withdrawn following “unforeseen delays in the relative regulatory approval process”, and the acquisition of the minority stake will instead be settled from the group’s own funds.
As a pure food and beverage manufacturing company having multiple distribution channels, Simonds Farsons Cisk plc is highly dependent on tourism and social interaction as well as mass events among the Maltese population. This was always evident over the past years as the group invariably benefitted when tourism figures were strong and occasional mass events took place.
However, given the abrupt impact of the pandemic on tourism figures, investors may have come to appreciate even more the group’s high dependency on tourism. In fact, at the end of May, Farsons reported that the group’s turnover dropped by almost 55 per cent in April 2020 (the first full month following the impact of COVID-19) when compared to the same month in 2019.
Farsons is undoubtedly highly dependent on tourism and also social activities and events
During their current financial year ending on January 31, 2021, Farsons expects revenues to drop by €24.3 million (23.5 per cent) to €79.2m. The Financial Analysis Summary dated September 23 does not provide segmental information on the expected impact across the three business segments. However, one can easily gauge the trends across the three business units from the interim financial statements as at July 31, also published on September 23.
During the first half of the 2020/21 financial year, the group’s largest area of activity, ‘Brewing, Production & Sale of Branded Beers & Beverages’, reported a 24.3 per cent decline in revenues to €21.8 million, while the ‘Importation, Wholesale & Retail of Food & Beverages’ showed a loss of 31.6 per cent in sales to €10.8 million. The worst-off in percentage terms was in the ‘Operation of Franchised Food Retailing Establishments’, as this segment experienced a drop of 51.7 per cent in revenues to €4.18 million. The group’s margins shrunk considerably during the first six months of their financial year with the operating profit margin dropping from a record high (at interim stage) of 14.4 per cent to just six per cent.
When looking once again at the forecast for the entire financial year, Farsons expects an operating profit of €3.5 million (-74.5 per cent) and EBITDA to contract by nearly 46 per cent to €12.3m. Farsons expects to generate a profit after tax of only €1.88 million in 2020/21 compared to €11.7m in the last financial year.
In recent announcements, the directors of Farsons highlighted the fact that the group entered the prevailing economic crisis triggered by the COVID-19 pandemic from a position of strength with a strong balance sheet comprising shareholders’ equity exceeding €116 million as a result of the many years of significant capital investment coupled with a prudent reinvestment policy of annual profits.
In fact, the group’s gearing ratio will remain below 30 per cent given the low level of net debt amounting to below €40 million. Despite the sharp contraction in EBITDA of 46 per cent, the interest cover will weaken but it will still amount to 11 times in 2020/21 given the low ongoing debt service obligations. Moreover, the net debt to EBITDA of 3.2 times also shows the strong creditworthiness of the group.
The pandemic is undoubtedly impacting Farsons in a more material manner than Premier Capital since the quick service restaurant sector is expected to recover much quicker, barring any further prolonged lockdowns, although Premier Capital remains very much reliant on its operations in Romania. On the other hand, Farsons is undoubtedly highly dependent on tourism and also social activities and events among the Maltese population.
As such, the continued high level of COVID-19 cases and the advice by health authorities to practise social distancing will continue to lead to weak sales figures in the months ahead. The extent of the recovery in the financial performance of Farsons will be dependent on the strength of resumption of air travel, which is in itself contingent on the successful rollout of a vaccine.
Although the news that emerged earlier this week is an important step in the fight against the pandemic, the successful rollout is determined by the effective distribution of this vaccine and others to follow on a global level.
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