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Famous Brands (FBR) will be the stock in focus: (Price at time of writing: R121.45) : 30 May 2016
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Background and overview of Famous Brands (FBR)
Famous Brands has been the darling on the JSE for years now. They have grown exponentially in recent years. The worry is whether this growth by acquisition strategy will be sustainable in the wrong run. They have to show that they can grow brands they acquired organically.
From FBR's website:
Famous Brands Limited is a holding company listed on the JSE Limited under the category Consumer Services: Travel and Leisure, and is Africa’s largest branded food service franchisor. The company was listed in November 1994 at a price of R1 per share, equating to a market capitalisation of R25 million. The past two decades have witnessed the Group expand almost beyond recognition from the business it was then, comprising only the Steers brand and a limited Supply Chain component, to the enterprise it is now, with a market capitalisation in excess of R11 billion, positioned within the JSE’s top 100 companies. At 08 March 2015 Famous Brands’ vertically integrated business model comprised a portfolio of 25 brands represented by a franchise network of 2 545 restaurants across South Africa, Rest of Africa, the United Kingdom and the Middle East, underpinned by substantial Logistics and Manufacturing operations. See more at www.famousbrands.co.za
From FBR's website:
Famous Brands Limited is a holding company listed on the JSE Limited under the category Consumer Services: Travel and Leisure, and is Africa’s largest branded food service franchisor. The company was listed in November 1994 at a price of R1 per share, equating to a market capitalisation of R25 million. The past two decades have witnessed the Group expand almost beyond recognition from the business it was then, comprising only the Steers brand and a limited Supply Chain component, to the enterprise it is now, with a market capitalisation in excess of R11 billion, positioned within the JSE’s top 100 companies. At 08 March 2015 Famous Brands’ vertically integrated business model comprised a portfolio of 25 brands represented by a franchise network of 2 545 restaurants across South Africa, Rest of Africa, the United Kingdom and the Middle East, underpinned by substantial Logistics and Manufacturing operations. See more at www.famousbrands.co.za
Scroll over or click on the funnel chart to get more details of FBRs latest financial results (year ending Feb 2016)
Financial review:
We wrote a while ago on Spur Corporation (SUR) and their approach to growth over the years. They followed a conservative organic growth strategy, while FBR followed the growth by acquisition approach. FBR as we mentioned in our SUR write up, went on a shopping spree for restuarants that would put Paris and Nicky Hilton to shame. They acquired various brands over recent years. In our last review we of Famous Brands we mentioned some of their acquisistions wich includes but are not limited to:
A 51% controlling stake in Lupa Osteria, an authentic Italian restaurant business trading in the full-service family casual dining segment
And 100% of Lamberts Bay Foods, the company processes French fries and other value-added potato products at its factory in Lambert's Bay, Western Cape, for sale to wholesalers, retailers and restaurant chains. LBF is one of only three French fries manufacturers in South Africa.
FBR acquired all these brands in order to reach critical mass and gain from economies of scale in their manufacturing and logistics services (as these serve more businesses the cost per unit of business decreases). The question that will remain for some time to come though is whether FBR bit off more than they can chew. Will they be able to make all the businesses they acquired over the years grow organically? Will FBR be able to grow organically instead of growing by acquisition?
FBR's net profit margin dropped slightly from over 14% 12monts ago to just under 13%. Perhaps an indication of tougher trading conditions being experienced than 12months ago.
FBR has an extremely strong cash generating business and cash is king, as its not a form of paper profits but actual cash generated by the business. FBR generated around R5.41a share in net profits, while it generated almost R7 per share in cash (similar to the cash generated per share 12months prior).
The following comment was made in our previous analysis "The ratio of net profit per share and cash generated suggests the underlying profits is largely driven by cash coming into the business and shows underlying strength of the business and its earnings. And we expect FBR to start increasing the dividend payments substantially in future as it spends less money on acquisitions and focus more on organic growth and paying out profits earned to shareholder by way of dividends.". This seems to be the case as Famous Brands increased their dividend by 16%
With a net profit margin of 12.8% FBR is doing something right (granted this margin is lower than the 14.7% achieved 12months ago), and would think that they would continue to do so even after long time man in charge Kevin Hedderwick retires and leaves the company.
- Milky Lane
- Mugg&Bean
- Vovo Telo
- Tasha's
- Turn n Tender
- Wakaberry
- O'Hagans
- House of Coffeee
A 51% controlling stake in Lupa Osteria, an authentic Italian restaurant business trading in the full-service family casual dining segment
And 100% of Lamberts Bay Foods, the company processes French fries and other value-added potato products at its factory in Lambert's Bay, Western Cape, for sale to wholesalers, retailers and restaurant chains. LBF is one of only three French fries manufacturers in South Africa.
FBR acquired all these brands in order to reach critical mass and gain from economies of scale in their manufacturing and logistics services (as these serve more businesses the cost per unit of business decreases). The question that will remain for some time to come though is whether FBR bit off more than they can chew. Will they be able to make all the businesses they acquired over the years grow organically? Will FBR be able to grow organically instead of growing by acquisition?
FBR's net profit margin dropped slightly from over 14% 12monts ago to just under 13%. Perhaps an indication of tougher trading conditions being experienced than 12months ago.
FBR has an extremely strong cash generating business and cash is king, as its not a form of paper profits but actual cash generated by the business. FBR generated around R5.41a share in net profits, while it generated almost R7 per share in cash (similar to the cash generated per share 12months prior).
The following comment was made in our previous analysis "The ratio of net profit per share and cash generated suggests the underlying profits is largely driven by cash coming into the business and shows underlying strength of the business and its earnings. And we expect FBR to start increasing the dividend payments substantially in future as it spends less money on acquisitions and focus more on organic growth and paying out profits earned to shareholder by way of dividends.". This seems to be the case as Famous Brands increased their dividend by 16%
With a net profit margin of 12.8% FBR is doing something right (granted this margin is lower than the 14.7% achieved 12months ago), and would think that they would continue to do so even after long time man in charge Kevin Hedderwick retires and leaves the company.
The graphic below shows the contribution of FBR's major divisions their revenue and contributions to pre-tax profits.
From the above analysis its clear that FBR is actually no longer just a restaurant owner but more of a logistics and supply chain management company than anything else. Thus one must wonder of they should be valued in the same way as other restaurant sector shares on the JSE or whether they should be valued more like Grindrod (GND) and Super Group (SPG). Their biggest margins are made on turnover from Franchise and Development with more than half of that turnover showing as profits. Perhaps FBR should focus more on this to boost margins.
A few financial ratios to mull over for Famous Brands (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 0.55 (more than 2 shows high levels of financial leverage). Famous Brands seems to be very lightly leveraged.
- Current Ratio: 1.51 (a measure of liquidity. Less than one signals possible trouble in paying off current liabilities)
- Quick Ratio: 1.04 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 22.90%
- Return on Equity (ROE): 35.57%
- Net Profit Margin: 12.80%
- Dividend Yield: 3.35%
Valuation:
While the consumers in South Africa are under pressure, there seems to be little stopping them from dining out more regularly and foregoing cooking at home. FBR has been slamming the brakes on their acquisition spree (they still buying stakes in restaurants but the pace seemed to have slowed) and seem to be focusing on developing organic growth now, and becoming more of logistics and manufacturing company than a restaurateur.
Based on FBR current financial results, its brands and their logistics and manufacturing activities, the market they operate it, and their strong net profit margins (and great financial ratios shown above) we value FBR at between R134.88 and R135.20. We therefore feel at their current price they present a good buying opportunity.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
Based on FBR current financial results, its brands and their logistics and manufacturing activities, the market they operate it, and their strong net profit margins (and great financial ratios shown above) we value FBR at between R134.88 and R135.20. We therefore feel at their current price they present a good buying opportunity.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
