Famous Brands regains its appetite for profit as bad Covid-19 taste recedes

Famous Brands has come roaring back into profitability in the year to end-February, after a dismal few years caused by problems with its former UK operation, Gourmet Burger Kitchen, and the effect of lockdowns and restrictions caused by the Covid-19 pandemic.

Despite the languishing SA economy, rising food inflation partly in response to the war in Ukraine, increasing social unrest and heightened rotational power cuts from Eskom, Famous Brands is demonstrating remarkable resilience. Provided there is no coronavirus resurgence, there are reasons to believe that Famous Brands’ recovery will continue well into 2023 and beyond.

For the year to endFebruary, revenue rose 38% to R6.5bn, gross profit margin rose from 42.8% to 45% and operating profit jumped 428% to R630m. Operating profit margin rose from 2.5% to 9.7%. Cash generated rose 67% to R871m and net debt/earnings before interest, taxation, depreciation & amortisation (ebitda) was a very comfortable 1.32 times. Headline earnings per share (Heps) rose 568% to 356c, and a dividend of 200c per share was declared.

Segmentally, the big driver of revenue is the supply chain, consisting of manufacturing, logistics and retail. But from an operating profit perspective, brands are where the action lies. Out of a total of R630m in operating profit, R371m came from leading brands such as Steers, Debonairs, Wimpy, Mugg & Bean and a few others. Signature brands, the niche operations within the group, made an operating loss of R8m. Supply chain in total contributed R361m, split R299m from manufacturing, R60m from logistics and only R2m from retail.

Debt repayments of R358m were made in the year, leaving undrawn debt facilities of R950m. Cash generation improved significantly, as has overall liquidity, and the group now has more than enough liquidity to cover all working capital and operational needs. During the year, 118 restaurants were opened, 149 were revamped and 69 were closed. The total number of restaurants in the group now stands at 2,824.

Operationally, the group benefited from a gradual lifting of coronavirus restrictions, though certain residual restrictions were in place that hampered trading to an extent. This was especially evident in the December tourism season, which is normally buoyant but which was negatively affected by the onset of the Omicron variant. The rest of Africa was hard hit by low vaccination rates and slowing economic growth in most countries. The UK presented a mixed picture; while coronavirus restrictions were progressively lifted during the course of last year, delivery sales slowed as customers returned to restaurants. Only one new restaurant was opened in the UK, while six were revamped and five were closed.

Manufacturing had a good year, with operating profit rising 65% on a 31% rise in revenues. The Gauteng bakery plant was closed in January.

In the aftermath of the pandemic, financial 2023 will largely be a year of consolidation. Much of the streamlining that was required just to stay alive in the past two years has been achieved and the group is now on a much more stable financial footing. Interestbearing debt will be reduced further and dividend payments will continue.

The group will have to resist the urge to expand by acquisition, as tempting as that strategy may appear in the new postpandemic era. All stakeholders will be looking for calm to return to the business and to let it participate fully in a relatively normal consumer environment after the upheavals of the past two years.

At 6,340c, the Famous Brands share price is 61% below its peak of 16,550c achieved in September 2016. And on a price:earnings ratio of 17.8 times, it’s not cheap. It will probably take quite a while to get back to anywhere near its previous peak and the current high inflation, high interest rate environment won’t do it any favours.