Fa­mous Brands vs Spur

Fa­mous Brands may have bit­ten off more than it can chew

Financial Mail - Investors Monthly - - Front Page - Stafford Thomas

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.

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