Orbis gambles on big buy-in as fast food stocks continue to struggle

CONTRARIAN fund manager Orbis Investment Management has plunged into one of the most poorly fancied stocks in the market, fast-food restaurant owner Collins Foods, seizing an 11.9 per cent stake to be one of its biggest shareholders.

By InvestSMART · 3 Jan 2012

By InvestSMART ·
3 Jan 2012

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Heavy buying in Collins Foods by the fund manager between December 5 and December 28 helped it quickly amass an initial stake of 8.397 million shares, representing 9.03 per cent of Collins Foods' issued capital, before a final spending spree before New Year's Eve saw Orbis collect a total of 11.05 million shares. This gives Orbis, which has a history of taking 10 per cent-plus holdings in small caps and other stocks viewed by the market as "down and out", an 11.89 per cent holding in Collins Foods to make it roughly the group's third-biggest shareholder.

Collins Foods, which operates 119 KFC and 85 Sizzler restaurants, was the second-biggest sharemarket float of last year, and earned the wrath of investors when only three months after its listing it issued a savage profit downgrade.

Shares in Collins Foods lost a quarter of their value in one day, when the company warned its pro forma after-tax profit for the first half of this financial year would be roughly $8 million, compared with a prospectus forecast of $10.3 million.

The share price dived to $1.43 and closed 2011 at $1.29.

Collins Foods was floated by private equity group Pacific Equity Partners in August at $2.50 a share, and the fallout has left a sour taste in the mouths of investors and dented the reputation of the private equity sector.

Notices issued to the Australian Securities Exchange show Orbis paid an average of $1.256 a share for Collins Foods stock early last month.

It picked up its second parcel of stock in the last week of December at an average of $1.254 a share.

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Frequently Asked Questions about this Article…

How large a stake did Orbis Investment Management take in Collins Foods?

Orbis built a roughly 11.89% holding in Collins Foods, acquiring a total of 11.05 million shares. An earlier parcel of 8.397 million shares represented about 9.03% of Collins Foods’ issued capital.

When and how did Orbis buy its shares in Collins Foods?

According to ASX notices, Orbis bought heavily between December 5 and December 28, with a final spending spree just before New Year’s Eve. It amassed an initial parcel during early December and picked up a second parcel in the last week of December.

How much did Orbis pay per share for Collins Foods stock?

Notices show Orbis paid an average of $1.256 per share for the early December purchases and about $1.254 per share for the second parcel bought in the last week of December.

What does Collins Foods actually do — what brands does it operate?

Collins Foods operates fast-food restaurants, specifically 119 KFC outlets and 85 Sizzler restaurants, according to the article.

Why did Collins Foods’ share price fall sharply earlier?

Shares plunged after Collins Foods issued a profit downgrade: it warned pro forma after‑tax profit for the first half would be roughly $8 million versus a prospectus forecast of $10.3 million. The shares lost about a quarter of their value in one day, dived to $1.43, and closed 2011 at $1.29.

Who floated Collins Foods and at what price?

Collins Foods was floated by private equity group Pacific Equity Partners in August at $2.50 a share. It was the second‑biggest sharemarket float of the prior year.

What kind of investor is Orbis and why is this purchase noteworthy?

Orbis is described as a contrarian fund manager with a history of taking 10%+ holdings in small caps and stocks seen by the market as "down and out." Its move into Collins Foods is noteworthy because it amassed a large stake in a poorly fancied stock that had recently suffered a profit downgrade and sharp share price fall.

What does Orbis’ large holding mean for everyday investors watching Collins Foods on the ASX?

Orbis’ roughly 11.89% stake makes it about the group’s third‑biggest shareholder, signalling that a major contrarian institutional investor has taken a substantial position in Collins Foods. For everyday investors, that is a notable development to monitor via ASX announcements and company updates, though the article does not provide investment advice.