4-Month Update: Resilient performance despite load-shedding
#themes: load-shedding, franchisee fee relief
Famous Brands released a four-month trading update (March to June 2023) focussing on the impact of load-shedding. Group revenue was up double digit (11% y/y) reflecting the business resilience. Revenue growth in SA (c. 92% of group revenue) increased by 10% y/y, but we believe there could be an element of low base effects, as the same period last year was still affected by COVID-19 lockdowns.
Load-shedding: Diesel costs increased to R8.8 million in 1Q24 (8.8x y/y) though the monthly run rate has slowed from R2.9m (Mar-May) to R1.3m in June 2023. The improved energy availability into June has seen a reduction in the proportion of sales made during load-shedding hours. As a result, loadshedding relief provided to franchisees (energy breaks) amounted to R8.83m (leading brands – royalties R4.2m and marketing fees R4.2m, Signature brands – royalties R270k and marketing fees R160k). Therefore, we expect reduced levels of load-shedding to boost marketing fees and royalties, supporting topline growth.
Brands SA (c. 15% of group revenue) was soft, up +7% y/y. Management notes that leading brands division (+9% y/y) was marginally below expectations as QSR was dragged by load-shedding. Casual dining is improving, but evening dining frequency has slowed. Signature brands continues to underperform (-1% y/y) increasing the possibility of potential disposals (SBGSe cumulative valuation c. R100m – R250m at best).
Supply Chain (c. 69% of group revenue) achieved double-digit growth (+12% y/y), supported by manufacturing (+14% y/y) and logistics (+9% y/y) supported by volume growth. Marketing Fees were softer at +7% y/y with Retail up 61% y/y.
International markets (UK and AME) performed well, delivering 20% y/y growth. We believe AME was supported by store growth, and management aims to increase their expansion in the Middle East region.
Our assumptions remain unchanged - we believe FBR's fundamentals remain intact.
- FBR benefits from strong brand resonance, fostering loyalty, even amid high competition.
- Healthy cash flow generation coupled with debt reduction is expected to support the balance sheet health and dividend resumption to boost shareholder returns.
- Although additional support to franchisees could indicate a challenging economic environment, we do not see the current concessions as significantly alarming.
- Management's commitment to sustain store rollouts in South Africa in FY24 suggests potential opportunities.
Therefore, considering the anticipated improvement in load-shedding and decelerating inflation, we expect improved demand and reduced margin pressure. In our view, management is likely understating the potential positive impact to volumes due to load-shedding, considering the relatively high inflationary environment which should ordinarily negatively impact volume growth.