Famous Brands vs Spur
Famous Brands may have bitten off more than it can chew
For well over a decade Famous Brands has done its shareholders proud — and it will probably do so again in future — but right now, it is a share to approach with care.
Caution is called for when any company announces it has “transformed” what has been a hugely successful business model. In October last year Famous Brands did just that when it closed a £120m deal that brought on board UK premium burger group Gourmet Burger Kitchen (GBK) as the 28th brand in its line-up.
GBK does indeed represent a radical break with Famous Brands’ traditional franchising model, built on power brands such as Debonairs Pizza, Steers, Wimpy and Mugg & Bean. With GBK, Famous Brands has entered the complex, big capex realm of corporate-owned stores on a grand scale.
For the cautious investor wanting exposure to the fastfood and restaurant sectors, it suggests that the way to go at present is to be long of the 14 p:e Spur Corp and short of the 18 p:e Famous Brands.
GBK has left Famous Brands with a heavy dose of financial indigestion. The deal resulted in Famous Brands’ balance sheet swinging from an ungeared position into one sporting debt of R2.86bn and a net debt-to-equity ratio of 165%.
Surging debt ramped up net interest charges from R8m in the first half of Famous Brands’ year to February to R184m in the full year. This, together with costs of R106m related to GBK’s acquisition, left headline EPS down 21%. Acquisition costs will be gone in the current financial year but not a full 12 months of interest.
Feeling the squeeze, Famous Brands passed its interim and final dividends in its latest year. While resumption of payments is indicated for the 2018 year “subject to future acquisitions”, there are no guarantees.
It makes Spur’s 5.2% dividend yield all the more attractive — more so given that it has never passed or cut a dividend in its more than 30-year listed history. Spur upped its interim dividend 6% at its interim result stage in December.
Famous Brands is arguably taking pain now for big gains later, with its management declaring that it is “optimistic” GBK will “add significant value over time”.
It is so optimistic that GBK’s target is to generate 45% of group profit within four to five years.
There is a very long way to go. GBK in its first 20 weeks of being consolidated by Famous Brands delivered revenue of R599m and operating profit of R36m. Annualised, GBK’s operating profit of R94m would have amounted to 10% of the R938m group total in the past financial year.
GBK, which has been in business 16 years, brought with it 97 restaurants, six of which are in Ireland. Famous Brands aims to open about 10 new GBK restaurants annually at a cost of about £1m each.
Famous Brands is tackling the UK market at a less than opportune time. Consumer confidence is being hit by rising inflation and muted wage growth, with terror attacks adding further damage.
So far this year there have been three terror attacks in London, where GBK has 36 restaurants, and one in Birmingham, where it has three. The attacks, including direct attacks on restaurants, left 41 people dead and 116 injured. The number of deaths is three times the number killed in attacks over the previous 10 years.
Spur itself ventured into the UK market with a corporate store model, only to exit it a year ago after racking up hefty
Famous Brands aims to open about 10 new GBK restaurants annually at a cost of about £1m each
losses. “The UK market was a disaster for Spur,” says the group’s CEO Pierre van Tonder.
The company is now sticking firmly to its franchise-only business model across its 591 restaurants, of which 530 are in SA, 47 in 12 other African countries, 11 in Australia and one each in New Zealand, Saudi Arabia and Oman.
Spur has changed its model through a more dynamic approach to expansion, which in recent years has resulted in additions to the group’s core Spur Steak Ranches, Panarottis Pizza Pasta and John Dory’s Fish Grill brand line-up. Key additions to the seven-brand line-up are premium burger brand RocoMamas and upmarket offering the Hussar Grill.
The big winner for Spur is RocoMamas, in which it recently upped its stake from 54% to 70%. Impressively, in the six months to December, RocoMamas’ operating profit from franchise fees jumped 62% year-on-year to R8.2m, while like-for-like restaurant turnover was up 45%.
With only 49 restaurants in SA and one each in Namibia, Saudi Arabia and Oman, RocoMamas is also a brand with big expansion potential. “Customer and franchisee interest is huge,” says Van Tonder.
Another interesting potential development in Spur’s future is strong interest from Grand Parade Investments (GPI), which upped its stake in Spur from 7.48% to 17.48% in May. Van Tonder limits his comment on that: “We are waiting to see how things develop.”
It is open to speculation what — if anything — will develop. But a combination of Spur and cash-flush GPI’s 70-store Burger King franchise brand, which it values at R660m, and its recently added niche fastfood brands Dunkin’ Donuts and Baskin-Robbins, would create a formidable line-up.