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I took a look at the Burger Fuel Worldwide [BFW.NZ] profit for the Full Year to 31 March 2009 last week and one of the concerns for me was that the cash position was more than halved over the year to just over NZ$1.5 million.
Chris Mason, Burger Fuel CEO noted in the release in the "BFW Outlook" part of the document that:
The board of directors have advised that the BFW strategy remains consistent with the previous year. The group is focused on three main areas:
1) Continued growth of the total system sales in NZ, by way of increased store sales as well as an increased number of stores. However, the board is mindful of the current economic climate.
2) Continuing to build up trading in both Australian stores to ensure future profitable expansion can ultimately occur in Australia.
3) Negotiating Area Development or Master Franchise agreements in other identified countries to earn royalties and other revenue by licensing the BurgerFuel system.
Given the global and local economic situation, a key focus has been on reducing costs to ensure that the group can preserve cash and eventually reach profitability. In the last six months to 31 March 2009 the company was close to breaking even. Costs will continue to be managed in accordance with board policy, however further losses are expected in the 6 months to 30 September 2009, due to the requirement to support international markets and also continue to expand NZ. Chris Mason, Burger Fuel CEO.
With cost cutting and wise capital management a primary issue for BF management, I thought a few questions to Josef Roberts, a Burger Fuel Executive director, were warranted, concerning the subject of dwindling cash reserves and the possibility that extra capital could be warranted to continue IPO flagged expansion.
I had the following brief email exchange with Josef on the topic of capital raising.
Share Investor Could BF investors learn how the company will expand as cash reserves are half what they were last year and getting very low as of 31/3/09.
Will the company have to borrow or ask for money from shareholders to grow?
Josef Roberts As you aware I am not in a position to answer any questions like that. These are matters for public announcement if and when deemed appropriate by the board of directors.
S.I. That is fair enough but can you tell shareholders what expectations there are for growth given the rapidly dwindling cash position of BFW and therefore the possibility of a halt because of capital restraints?
J.R. Darren – like many company’s right now capital is scarce. We are no different and lack of capital affects growth – that’s for real, however, we have no debt and as you can see by our losses over the last 6 months, we can stem these by reducing investment. We would like more capital – of course we would – and it is certainly on our radar, we always wanted to raise $15M and we know that additional capital would speed up results. However, there are ways we can still grow on less capital and that’s what we are focusing on for now.
S.I. I am sure shareholders wouldn't mind investing more if there was a rights issue or some such capital raising. Now is a good opportunity to expand given cheaper leases and real estate costs.
J.R. You are right for sure – now is the time to invest in expansion. I will be sure to let you know if we decide to look at a capital raise and if this was done at a good price - well maybe we would get the uptake. Anyway - as I say these things are on the radar Darren.
Take it as you may readers but Josef is dead right, his company is in a position that many others are in and that some have faced already.
In my own portfolio for example 4 of my companies have already raised a total of more than $NZ 600 million in new capital and I have participated in 3 of them (1 2 3) to the tune of $7000.00.
Burger Fuel is no different.
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c Share Investor 2009
Burger Fuel Worldwide [BFW.NZ] had their profit for the year to 31 March 2009 out today and I expected a poor performance but on the surface it looks like things are getting better. It is difficult to compare this years result to last years as operations for 2008 are for less than 12 months of operations.
Lets have a look at the results in a bit more detail.
Key Points
1. Revenue for the franchisor up 70% to just over NZ$ 8 million.
2. More than half of franchisor income derived from food & beverage sales of company owned stores.
3. Losses pegged back 67% to just over 700K.
4. Revenue for franchisee & company owned stores up by over 15% to nearly $26 million. (Food and Beverage sales)
5. 3 more stores added to take total to 28.
6. International agreements for 3 territories signed.
7. losses slowing in the last half year.
8. No "material" borrowings.
9. Cash on hand substantially lower from $3.5 million last year to just over $1.5 million.
There is good indication of improved sales and slowing losses at both the franchisor and at store level but it isn't clear as to how much of the slowing losses are due to the logical response of management to cut back on costs due to the global recession. These costs were higher in the last period and would have contributed to the higher losses.
Much of the excitement around the Burger Fuel IPO 2 years ago was in the growth for the company and spectacular growth was needed to achieve good profit for the franchisor. As this appears to have slowed in the last half, expectations would be that this growth and profit are going to be delayed somewhat until economic conditions make growth a good business proposition again. This is pointed out by an executive director of the company Josef Roberts, who has indicated that expansion has been slowed considerably in new territories in the Middle East and in Australia where consolidation and more branding will be done before any more expansion there.
High growth and profit is needed to justify the high capital value that is currently put on the company, in comparison to its profit and future prospects, and shareholders are unlikely to see any concrete sustained profit until economies of scale are reached and unfortunately that means more money being spent on building up the business.
A big worry is that more than half of company revenue is from food and beverage sales from company owned stores, the rest comes from royalties, licensing and franchise fees and advertising charges to franchisees, originally forecast to be the bulk of income for the company during pre-IPO publicity.
With just over $1.5 million of cash at hand, which is substantially lower than for the last comparable period , the company is going to have to either borrow money or go to shareholders when it wants to start expanding again.
Until then they are just marking time.
Please Note
It must be noted that 2009 figures are difficult to accurately compare to last years because the 2008 period was only for 9.5 months and management haven't indicated whether adjustments have been made to reflect that in their own figures -it looks likely not to be the case so the large increases in sales and lower losses must reflect the two different reporting periods. In addition there are many accuracies in comparisons made because of less than two years in business and one off IPO costs other costs and other revenue included previously, making current year results look better than they should at first glance.
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c Share Investor 2009
The Burger Fuel Worldwide [BFW.NZ] 2009 half year profit to 30 September is more of the same from this company, continued and mounting losses.
