Fa­mous Brands sheds more than 28% since be­gin­ning of this year

Share price slides de­spite group’s good ac­qui­si­tions af­ter years of great earn­ings growth

The Star Early Edition - - COMPANIES - Sandile Mchunu

AFRICA’S largest branded food ser­vice fran­chisor, Fa­mous Brands, saw its share price slide more than 28 per­cent since the be­gin­ning of the year, de­spite the group mak­ing six good ac­qui­si­tions last year.

The group traded at R153.31 a share on the JSE on Jan­uary 3, but by yes­ter­day af­ter­noon the share price had fallen to R119, los­ing 28.83 per­cent in just more than six months.

In­dus­try an­a­lysts at­trib­uted the de­cline to mul­ti­ple fac­tors.

Ash­bur­ton In­vest­ments fund man­ager Ja­son Forss­man said at the end of last month Fa­mous Brands re­ported a de­cline in head­line earn­ings of 21 per­cent.

“If you ex­clude the ac­qui­si­tion costs re­lated to the R2.1 bil­lion ac­qui­si­tion of UKbased burger chain, Gourmet Burger Kitchen (GBK), earn­ings a share would have shown a de­cline of 4.1per­cent. This is in con­trast to mul­ti­ple years of dou­ble-digit earn­ings growth which en­deared the com­pany to South African share­hold­ers,” said Forss­man.

He said the re­cent de­cline in the share price re­flected risks in the change of the group’s strat­egy from a pure fran­chise model to in­clude com­pany-owned restau­rants, as well as a de­pressed un­der­ly­ing eco­nomic en­vi­ron­ment squeez­ing the tar­get con­sumer’s dis­cre­tionary spend.

36ONE As­set Man­age­ment an­a­lyst Sh­muel Simp­son said the shares had been un­der pres­sure due to mul­ti­ple fac­tors.

“For starters the con­sumer has been un­der se­vere strain with less dis­pos­able in­come to spend at restau­rants. There is also con­cern about the GBK ac­qui­si­tion and whether they over­paid for the as­set.

“It will take time to see if the growth ma­te­ri­alises. There has also been a gen­eral de-rat­ing of smaller illiq­uid shares, which may also be putting pres­sure on the share price,” said Simp­son.

Mer­gence In­vest­ment Man­agers in­vest­ment an­a­lyst Nol­wan­dle Mthombeni shared the same sen­ti­ment.

“The main cat­a­lyst for the de-rat­ing of the share price is the ac­qui­si­tion of GBK in which it paid a hefty premium for the busi­ness. The ac­qui­si­tion is a cor­po­rate-owned model com­pared to a fran­chise model (mean­ing this will di­lute mar­gins and will re­quire capex for growth).

“And lastly the ac­qui­si­tion was funded fully through debt and the div­i­dend was sus­pended in or­der to re­pay the debt,” said Mthombeni.

She said this ac­qui­si­tion not only de­vi­ated from the norm of Fa­mous Brands’ his­tory but it would gen­er­ate lower re­turns due to be­ing a lower-mar­gin busi­ness and cap­i­tal in­ten­sive. “To top it all it is in a re­gion that they have not per­formed well in, with the likes of Wimpy UK. The mar­ket is likely tak­ing this view from a val­u­a­tion per­spec­tive.”

De­spite the chal­lenges the an­a­lysts were still con­fi­dent about the busi­ness go­ing for­ward. Forss­man said: “Fa­mous Brands re­mains well-man­aged, has a diversified port­fo­lio and a track record that sug­gests an abil­ity to nav­i­gate suc­cess­fully through its cur­rent chal­lenges.

“The mar­ket is ex­pect­ing a ma­te­rial im­prove­ment in earn­ings off a low base.”

Simp­son said: “Fa­mous Brands is an ex­cel­lent busi­ness with great man­age­ment and a fan­tas­tic busi­ness model. How­ever, it is not im­mune to the dif­fi­cult eco­nomic con­di­tions and may take some strain as the econ­omy strug­gles. The GBK ac­qui­si­tion should be­gin con­tribut­ing more mean­ing­fully to earn­ings.”

Mthombeni said we could ex­pect the South African port­fo­lio to de­liver mid to high sin­gle-digit growth and to out­per­form peers due to the strong brands and diver­sity of the port­fo­lio.

PHOTO: SUP­PLIED

Fa­mous Brands owns a ma­jor­ity stake in Vovo Telo, a chain of sub­ur­ban cof­fee shops and bak­eries.

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