Overall, markets calmed down somewhat in the third quarter, after a tumultuous and volatile first half of the year. The EAFE International Index improved by 6.5% in the third quarter to finally climb into the green, up by 2.2% year-to-date. The Pendo International Strategy followed a similar pattern, whiplashing early in the year and finally stabilizing and gaining 5.6% for the quarter, and up 11.5% YTD.
One of our favorite long-term opportunities remains India, which in many ways resembles the China of 30 years ago. China had years of double-digit GDP growth, but has slowed down to a more terrestrial 6-7% range. While it still has massive potential for continued future economic growth, it is losing its place as the go-to story for economic development and a global driver of growth.
Since India gained independence in 1947, the government has striven to foster unity among the different states in order to overshadow the many differences inherent, and thus promote a unity and national interest. With 29 states and 7 union territories, this has had various levels of success. Along the way it inadvertently helped to contribute to different states clinging to their own authority and setting up what has in some cases become a byzantine system of laws, rules, trade regulations, etc.; imagine the 50 United States having strict, separate regulations and standards for trade apart from federal oversight.
It had gotten to the point that due to bureaucratic shackles, it was virtually impossible to effect change and establish a vibrant, efficient economy for all states and classes (there is actually a magazine called Bureaucracy Today!).
In 2014, Narendra Modi was installed as the 15th Prime Minister of India. The margin of victory was such that his party gained an outright victory, and therefore no need for a coalition government. The hope was that he could do for the Indian economy as a whole what he had accomplished as the longest serving Chief Minister of the state of Gujarat from 2001–14. He was able to greatly increase economic growth (roughly 10% a year), improve and expand infrastructure, and cut through the famously byzantine and glacial-moving Indian bureaucracy.
Change has come in a slow but sure fashion, and the summer of 2016 saw many reforms passed, including the Goods and Services Tax bill (GST), which unifies the tax system and allows goods and services to move freely across states and territories. This was the most significant of efforts to spark creative competition and encourage enterprise among the states. Coupled with efforts to eliminate burdensome foreign investment directives, and lack of opportunities in matured, developed economies, investors should soon find India even more appealing.
Famous Brands has had a busy year with several acquisitions. The company is Africa’s largest quick serve and casual dining franchise chain with over 2,600 restaurants, primarily in Sub-Saharan Africa. Founded by four brothers over 30 years ago, the company has now reached scale resulting in streamlined logistics and marketing efforts. With an already high double-digit growth rate, we are expecting the growth to continue at a rapid clip.
FBR’s balance sheet is very healthy. Despite a slight net cash position, the company’s ROE is 36%. In theory, if they had a 25% debt ratio, their ROE would have been 48%. In addition, its earnings from operations have grown at a 17% compound annual growth rate for the last 5 years. Even at its relatively small $1.1 billion market cap, the company is completely dominating the casual dining and fast food industry in Sub-Saharan Africa.
The company is in an acquisitive period and has made the following investments just this year; all were funded with available cash.
- 51% of Lupa Osteria, an Italian casual dining chain
- 51% of Salsa Mexican Grill, a newly opened Mexican fast casual dining concept
- 100% of Tomato Paste Plant, which plans to partner local farmers in strategic ventures
- 100% of Gourmet Burger Kitchen (GBK), a UK-based upscale burger chain with 75 wholly-owned restaurants
Perhaps the most interesting on the list is the UK-based GBK. This is an upscale burger spot, founded in 2001 by three New Zealanders, together with the creative culinary support of acclaimed ‘father of fusion,’ Peter Gordon. In 2010, the business was acquired by the Yellowwoods Group, which set the brand on its current growth trajectory. GBK now comprises 75 company-owned restaurants across the UK and is widely renowned as the market leader in the premium burger category. It will be interesting to see if and how Famous Brands converts the wholly-owned restaurants to franchises, which is a proficiency of Famous Brands.