While Spur’s interim results make it clear the group is well clear of the pandemic blues, the holding company has a major job on its hands to rejig its now decades-old franchise model.
“If you look at franchising say 10 or 20 years ago it was a very clear model. Market conditions were more stable, you knew if you invested in a store you would achieve a high double-digit return over the years,” says CEO Val Nichas.
Now, “wages have gone up, we’ve had to look at ways of lowering electricity costs and had to invest in more things because of automation, food inflation and now the electricity crisis”, she says.
Returns can still hit double digits — but don’t reach the 20% levels of the past, she says.
Spur is working on getting better pricing for consumers and promoting harder-to-get feet into its restaurants, to achieve better margins for franchisees
Spur, which also owns RocoMamas, Panarottis and The Hussar Grill, says it’s trying to achieve better margins for franchisees by fixing supply chain issues, cutting menu prices and luring customers to its restaurants. Only five of the 647 restaurants in the group are company owned, while the rest are franchised.
South Africa’s interminable power cuts are putting huge strain on businesses everywhere. Says Spur: “In a recent audit, we found that generator running expenses account for between 0.5% and 2.6% of turnover. Our team is currently negotiating a group deal on diesel pricing to help address the issue.”
In other areas, it’s battling water shortages that have required franchisees to install JoJo tanks and bring in water to continue operating. “Water supply is the top risk facing the restaurant industry,” says Nichas.
Yet all these challenges didn’t stop the group delivering stellar interim results. Profits almost tripled in the six months ended December, with the Western Cape (up 31%) standing out. Sales were helped by a revival in tourism, pent-up post-Covid demand and, ironically, load-shedding — which has forced more families to eat out than try to cook supper by candlelight at home.
Umthombo Wealth portfolio manager Alex Duys says the results — revenue overall climbed 35% to R4.9bn and diluted headline earnings per share jumped 198.5% to 136.6c — were “excellent”.
For me it feels like Spur has found its mojo again. Management is doing the right things, and the valuation is very compelling
— Alex Duys
“For me it feels like Spur has found its mojo again. Management is doing the right things, and the valuation is very compelling. Also, the risks are substantially lower.
“Even with load-shedding — people are forced to go out. Spur’s a brand that is well respected in South Africa, especially for those with kids, and I can’t see that changing anytime soon. There’s definitely new energy in the business and at these valuation levels it’s certainly worth investing,” Duys told Business Day TV this week.
The company is also in a net cash position, with cash on hand of R293.5m and growing. Unsurprisingly, shares in the group have rallied 9% year to date, and are 10% up over 12 months.
Growth in South Africa was driven mainly by the Spur brand, which increased restaurant sales 33.6% and accounted for just over two-thirds of local sales. Panarottis increased restaurant sales by 28.5%, while the speciality brand portfolio grew sales 62.3%, with strong performances by The Hussar Grill and Casa Bella. These brands benefited from the recovery in local and international tourism.
Nichas says management is aware the group has a significant level of free cash on the balance sheet and is looking at how best to use it, though it wants some buffer against a potential downturn. While Spur paid a dividend of 82c a share, the company also bought back 1.5-million of its own shares (at an average cost of R21.33 a share) during the reporting period. It’s not ruling out M&A opportunities.
As for changing the franchise business model, Nichas says: “We will need some clever thinking. Maybe it’s about the size of the store and return on investment on set-up costs.” She cites a case in Carletonville, where Spur reduced the store size and achieved the same turnover.
The group is also keen to attract more black franchisees. At the moment, they run 157 of the restaurants.
To attract young entrepreneurs, Spur is reviewing the entry-level cost of investment — though it’s still a substantial outlay. Says Nichas: “You might invest in a Panarottis Express at R1.5m or R1.8m ... other (stores) are R3.5m-R5m depending on size.”
As a group, Spur plans to open 17 new restaurants in the second half of the financial year, which is historically not as strong as the first half. It’s not looking at starting any new brands, but there are several “innovation projects” in the pipeline, it says.
The focus remains South Africa and Africa, with no immediate plans to enter any developed markets. The Spur group now trades in 14 countries, having just opened a RocoMamas in the Democratic Republic of Congo this month.
Cobus Cilliers, senior equity analyst at All Weather Capital, lauded the results as “rock solid”.
They're doing all the right things
— Cobus Cilliers
“They’re doing all the right things,” he tells the FM.
“It’s very clear that Spur and the underlying brands in its stable are well positioned, results were possibly better than the market expected.”
He believes part of the reason is that the Spur corporate clout helped outlets in the chain win concessions in rental negotiations during the pandemic.
He’s also gung-ho about the company’s cash position. “Spur has net cash of around R3.60 a share; that’s a lot of cash that’s not doing anything.”
At a forward p:e of about eight, analysts argue the company is cheap.
“It seems like Spur will do well in the second half and they’re trading the best they’ve ever traded. We think the company is undervalued and growing. It ticks the boxes of what you want in an investment,” says Cilliers.
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