|
Famous Brands (FBR) will be the stock in focus: (Price at time of writing: R155.50) : 25 October 2016
|
Related Topics |
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. Their share price has taken a shot or two the last day or two after their results announcement. Lets check if it's justified or not. Are they overvalued or is the market overreacting.
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 (6 months ending August 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:
In addition to these acquisitions their main brands include Wimpy, Debonairs, Fish Aways, Mythos and then their massive acquisition in the UK called Gourmet Burger Kitchen. It's due to this acquisition that FBR is not paying an interim dividend. As they keeping cash in hand to fund the acquisition and to ensure enough float is available for the daily running of their businesses.
- Milky Lane
- Mugg&Bean
- Vovo Telo
- Tasha's
- Turn n Tender
- Wakaberry
- O'Hagans
- House of Coffees
- Salsa Mexican Grill
- Lupa Osteria
In addition to these acquisitions their main brands include Wimpy, Debonairs, Fish Aways, Mythos and then their massive acquisition in the UK called Gourmet Burger Kitchen. It's due to this acquisition that FBR is not paying an interim dividend. As they keeping cash in hand to fund the acquisition and to ensure enough float is available for the daily running of their businesses.
In a previous review we said the following "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?" We still feel the same way. Will FBR be able to extract growth from all of these. Or is their plan to rather make money from their logistics and manufacturing activities?
FBR's net profit margin dropped slightly from over 13% for full year (6 monts earlier) to just over 11% (after one excludes exceptional derivative gain from their profits). Perhaps an indication of tougher trading conditions being experienced than 6months ago.
FBR is 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 R2.70 a share in net profits (similar to a full year earnings per share of R5.40, which was their earnings per share for the previous full year), while it generated almost R4.60 per share in cash. So while earnings after exceptional items are higher than it was 12months ago. Its similar to full year results announced 6months ago. So growth does seem to have slowed to a halt.
With a net profit margin of 11% FBR is doing something right (granted this margin is lower than the 13% achieved for the full year), and would think that they would continue to do so even after long time man in charge Kevin Hedderwick retires and leaves the company.
FBR's net profit margin dropped slightly from over 13% for full year (6 monts earlier) to just over 11% (after one excludes exceptional derivative gain from their profits). Perhaps an indication of tougher trading conditions being experienced than 6months ago.
FBR is 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 R2.70 a share in net profits (similar to a full year earnings per share of R5.40, which was their earnings per share for the previous full year), while it generated almost R4.60 per share in cash. So while earnings after exceptional items are higher than it was 12months ago. Its similar to full year results announced 6months ago. So growth does seem to have slowed to a halt.
With a net profit margin of 11% FBR is doing something right (granted this margin is lower than the 13% achieved for the full year), 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 holdings to their turnover/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 pre-profits. But in saying that Franchise and Development only makes up 33% of pre-tax profits. The rest is all made up by essentially non restaurant activities which is manufacturing, logistics and supply chain related activities. The biggest contributor to FBR's pre-tax profits being Supply Chain with it making up just over 33% of total pre-tax profits.
A few financial ratios to mull over for Famous Brands (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 0.99 (more than 2 shows high levels of financial leverage). Famous Brands seems to be very lightly leveraged.
- Current Ratio: 1.35 (A measure of liquidity. Less than one signals possible trouble in paying off current liabilities)
- Quick Ratio: 1.07(Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 8.29%
- Return on Equity (ROE):16.51%
- Net Profit Margin: 11.01%
- Dividend Yield: 1.36%
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 R151.64 and R152
We therefore feel at their current price they are close to full value and would not recommend buying unless the price drop belows the R152 a share level.
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 R151.64 and R152
We therefore feel at their current price they are close to full value and would not recommend buying unless the price drop belows the R152 a share level.
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.