IM last wrote on Famous Brands in June in the aftermath of an exciting election that held great promise for South Africa.
The group’s share was then trading at about R48 and IM considered it a decent hold with some chance of share price upside and a dividend to pay you to wait around. But the share has done much better than that, getting to a new 52-week high in October of R67.52 and trading at about R63 at time of writing.
Several months further down the GNU road, it’s become apparent that some risks, such as load-shedding, are truly behind us. It’s also clear that the weaknesses in Famous Brands’ model are getting worse, making it urgent for the group to focus on getting the basics right.
Recent performance has been a good example of why holding a share through uncertainty can end up being smarter than selling, unless there are risks that point to a high likelihood of poor performance.
Famous Brands has a patchy track record of execution, and remains far too complicated, but it still enjoyed the upswing in the local market this year. It trails rival Spur Corp significantly over 12 months, though, with Spur up 25% and Famous Brands just 6%. Admittedly, the date you choose as your entry point to compare the performance of the two stocks will make all the difference.
With the release of interim results for the six months to August, fresh information is available to consider. There isn’t much growth to sink your teeth into, with revenue up just 2% and flat operating profit. Despite this, headline earnings increased by 9.5% and the dividend per share was up 9%. This unusually shaped income statement owes its existence to a 7% decrease in net finance costs thanks to debt repayments, as well as the tax expense decreasing by 5% despite profit before tax being up 4%. That drove an increase in profit after tax of 8%, bringing us closer to the headline earnings movement.
In the results presentation, Famous Brands reminds us that half of this period was affected by pre-election uncertainty. The share price may have moved in anticipation of good times, but thinking that it would happen in the six months to August was perhaps too optimistic. The first quarter was dismal, but with things improving substantially in the second quarter. This is the kind of thing the market latches onto, as the hope is for a strong second half to the year.
The second-quarter improvement was seen in Leading Brands (the takeaway-style restaurants) rather than Signature Brands (the full-service restaurants, serving liquor). Though Famous Brands tries to pin this onto consumer affordability issues, it’s not hard to scan the list of brands included in Signature Brands and realise that there are few, if any, genuine winners in there.
Famous Brands has a patchy track record of execution, and remains far too complicated, but it still enjoyed the upswing in the local market this year
Leading Brands is packed with the household names that made Famous Brands, well, famous. Signature Brands shows what happens when you try too hard to diversify. It even swung into a modest loss this period after making practically no profit in the comparable period.
Frankly, Famous Brands would do well to get rid of Signature Brands and give investors a cleaner story to focus on. Instead, they make odd decisions such as allocating R11m in capex to Signature Brands vs R18m to Leading Brands.
For context, Leading Brands generated R238m in operating profit, and the supply chain is good for R182m, so the supply chain is also a very important part of the business.
Within the supply chain, it’s a mixed bag of improved profitability in manufacturing despite flat revenue, yet a dip in profits in logistics despite positive revenue growth. The retail segment in the supply chain is a marginal part of the business and probably more useful for brand recognition in grocery store aisles than anything else, slipping into a loss of R2.6m for this period.
The rest of the group just talks to the same issues, really. The Southern African Development Community segment fell 9.3%. The UK — where Wimpy saw profit tumble 68% — and the Rest of Africa and the Middle East reported an even larger loss than last year, coming in at R22.4m. Messy, complicated and distracting for investors.
It’s high time Famous Brands focused on its genuinely famous brands and cleaned up the rest of the group. Though the share is still a hold, thanks to decreasing interest rates and improving consumer sentiment, IM’s pick in the sector remains Spur for its simpler execution.
The Finance Ghost
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