Famous Brands resilience keeps patrons happy

At a time when SA’s consumers remain increasingly hard-pressed due to sustained rising costs, companies heavy reliant on their disposable income, in theory, should see more pain.

Yet, Famous Brands, the owner of eateries such as Steers, Debonairs Pizza, Wimpy, Mugg & Bean, Tashas and a throng of other restaurant chains, continues to punch above the consumer slump.

The secret says outgoing CEO Kevin Hedderwick lies in its brands. “It certainly helps to have many brands which appeal to all types of consumers and wherever you are in terms of your income bracket, our brands will serve you,” Hedderwick tells Moneyweb.

Hedderwick, who handed over the reins to Darren Hele after being at the helm of the franchise giant for 16 years, says there is no sign of decline in people eating out. “When times are tough people still want to spoil themselves. They also go out to restaurants to get food that they can’t get at home,” he says.

This has propelled the company to report on Monday a 31% rise in revenue to R4.3 billion for the year to February 29 2016, adding impetus to its fifteenth consecutive year of growth.

Its revenue growth is attributable to organic and acquisitive growth, including healthy system-wide sales in the franchise brand portfolio – resulting in operating profit growth of 18% to R792 million.  The operating margin dropped to 18.4% from last year’s 20.5% – primarily as a function of integrating its newly acquired businesses in the company. Famous Brands rewarded shareholders with a 16% rise in the headline earnings per share to 541 cents.

Beyond cashing in on consumers’ appetites, at work is a strategy of aggressively rolling out restaurants. It plans to open 292 franchise restaurants in the year ahead, as it looks to gain market share in an increasingly competitive food segment.

A total of 184 new restaurants were opened across its brand portfolio during the period, bringing the number of its restaurants to 2 614.  “We are well on our way to having over 3 000 restaurants,” says Hedderwick.

Restaurant rollouts will be on what Hedderwick calls “big gorillas and power brands” such as Steers, Debonairs Pizza, Mugg & Bean and Fishaways. On its gorilla status,  Hedderwick says Steers and Debonairs Pizza are star performers recording 1.2 million and 2 million customers annually respectively.

Part of its restaurant roll out plans is to grow its exposure to the casual evening dining segment – where it is underrepresented. To do this, Famous Brands is shifting focus to its Turn ‘n Tender brand where it will rollout more restaurants.

It recently acquired a 51% stakes in Italian restaurant chain Lupa Osteria, seafood and sushi brand Catch and Mexican food and beverages chain Salsa Mexican Grill, which Hedderwick says will also boost the company’s clout in the evening dining segment.

“We are far from done in making sure we add colour to the front-end business in the evening dining segment. There is still a lot of work to do.”

Store rollout plans will also be throughout the African continent and the Middle East, as part of its 2020 strategic intent is to become a bellwether in leisure and consumer products.

Logistics and manufacturing

Beyond selling fast food, Famous Brands makes food ingredients and transports them to its outlets through back-end integration at its logistics and manufacturing business. It has aggressively grown its quest for vertical integration in its business in recent years. Revenue for the logistics and manufacturing business grew by 34% to R3.4 billion, while operating profit increased by 33% to R348 million.

As part of its vertical integration, Famous Brands recently acquired one of SA’s biggest producers of french fries and other potato-based products, Lamberts Bay Foods, a subsidiary of JSE-listed fishing company Oceana Group. The company produces products for sale to wholesalers, retailers, and restaurant chains.

Rexsolom Invest portfolio manager Anthony Rocchi says Famous Brands has one of the most aggressive asset growth rates he has seen, given the company’s compounded annual growth rate of 19% since 2005.

“They can afford to be this aggressive because they generate so much free cash flow. For every R1 they have invested in capital expenditure and/or acquisitions since 2006 the group has generated R2.58 in cash from operating activities. Companies that achieve such a ratio are in the minority,” says Rocchi.  See graph below.

Source: Rexsolom Invest.

Famous Brands is trading off a forward 18.5x PE and Rocchi says the stock never trades cheaply.  Rexsolom Invest’s fair value estimate on the company’s stock is R77/share compared with the current R119.48/share.  “But it’s not unusual for the market to ascribe a hefty premium to a company that grows aggressively while boasting solid fundamentals.”

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