I don't remember the last time Bonvests didn’t say, "The Food & Beverage Division will continue to face challenging market conditions" in its quarterly earnings report. Third quarter earnings announced Wednesday are no different. It still earns considerable revenue from it, but is losing money on it. This naturally leads to the question: why is Bonvests persevering with it, and should it in fact sell it? We think it should.

Bonvests has been the authorised franchisee of Burger King stores in Singapore in 1982. It has 46 stores. It has also operated Orange Julius stores since 1999 and Dairy Queen stores since 2001. Their most prominent outlets are at the corner of Orchard Road and Scotts Road, where they sit alongside each other. Burger King is certainly a globally-known brand and no doubt a source of pride for Bonvests. But companies have to be ruthless and ask themselves whether underperforming or struggling businesses could be improved, or sold. Such is the investment philosophy of General Electric, which has shown repeatedly that falling in love with any business division doesn't work. Is Bonvests in love with the Burger King brand?

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Judging by the prominence of its bus ads, Burger King is doing well. It has considerable license to tell people how good its food tastes, without having to sell apples in its stores or conduct high-profile lab tests on the fat content of its menu items, like McDonald's. But the fact is, if the business is not making money, why persevere?

Here are the facts (taken from their earnings announcement Wednesday):

1. Revenue –9.1% to S$66.9 mln
2. Net profit +21% to S$11.1 mln
3. Cash generated from operations: S$17.2 mln, down slightly from S$18.1 mln

Of the S$67 mln in revenue, only S$15.6 mln came from its food and beverage division, up less than 2%. By contrast, its Hotel business had 16% growth in sales to S$25.1 mln.

The S$11 mln in net profit could have actually been higher by S$95,000 if it didn't have the food and beverage division. Its Hotel and Property Development divisions were responsible for almost all of it.

Bonvests' earnings from property development may be patchy, due to the nature of this industry. For example, in Q3 last year it booked several million dollars worth of revenue in The Trumps development, which it didn't have this year (The Trumps was fully sold in the first half of 2007). In the absence of any enlightening commentary from the company, or analyst reports, here is our view:

1. Bonvests should divest its Burger King franchise, if contractual obligations permit
2. The proceeds from the sale of the franchise could be put towards more property developments, or something entirely different altogether.
3. In the absence of new businesses to invest in, Bonvests could pay out a special dividend, like the 15 cents paid last year on top of the steady 4.5 cent a share dividend

What do you think?


Mark Laudi

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Labels: Bonvests, Burger King, Dairy Queen, Orange Julius