FY24: Tough conditions but fundamentals remain sound.
Tinashe Hofisi
#themes: cost pressures, volumes, price increases
Famous Brands' FY24 results underperformed relative to our and management’s expectations. However, the result was largely telegraphed as investors digested the group’s delayed implementation of alternate power supply and relatively lower exposure to drive thru facilities when compared to peers. Considering the FY24 underperformance and looking to FY25E, the group has the ability to deliver a 2-year HEPS CAGR of c. 18.3% based on SBGSe, which keeps us constructive.
Group Revenue increased by 8% y/y (SBGSe: +10.3%), driven mainly by price hikes as volumes, especially in QSR, were weaker. CDR outperformed, aligning with sector trends. Transaction value slowed, reflecting pressure on disposable income. Operating Profit declined by 6% y/y (SBGSe: +6.1%). Excluding a GBK dividend of c. R75m, operating profit would have risen by about 2% y/y. Operating margins contracted by c. 150bps to 10.1% due to lost volumes from load-shedding, input cost pressures, diesel costs (c. R24m, c. 0.3% of total revenue) insurance and franchisee fee relief (c. 20.6m). HEPS decreased by 5% y/y (SBGSe: +2.1%) due to a 47% y/y increase in net finance charges. Excluding franchisee fees and diesel costs, HEPS would have remained flat y/y. To conserve cash, the dividend payout was reduced to 65% (from 74% in FY23), leading to a 17% y/y decline in DPS to 302cps. This supported an enhancement in Cash conversion (CFO/EBTIDA) to 105% from 88% as cash generated by operations increased by 13% y/y.
Post period end trade soft, though margin recovery expected. Mar’24 and Apr’24 sales were soft, continuing the low growth experienced in Jan24 and Feb24. However, management is confident in a recovery in volumes supporting margins. We see further margin support from easing input cost pressures, reduced load-shedding intensity, and potential deceleration in fuel prices. While convenience will continue to anchor QSR demand, we expect volumes to be subdued while CDR hold its own due to the normalisation of livelihoods post the pandemic.
Franchise fee take rates a potential growth lever, in our view, with management limiting increases to support franchisee sustainability until conditions improve. The proportion of franchisee partners (44.5%) with over 10 years increased by 310bps y/y, enhancing portfolio stability. These experienced partners possess the necessary knowledge and skills to navigate operations effectively.
Water Shortages: Manufacturing has sufficient capacity, but restaurants are still lagging with around 35% coverage. However, rolling out alternative water supply is indicated to be relatively easy.
We have adjusted our HEPS estimates to reflect weaker volumes and the impact of supply chain disruptions on profitability. We now value FBR between R61 to R65 (previously R67 to R76) and estimate a 12m Fwd. PE of c. 9.2x. Risks to our view include sustained pressure on disposable income, heightened competition, potential extension or increase in franchisee fee relief, and cost-push inflation.
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