Soft print but improving outlook

#themes: price inflation, volumes, and product mix

Famous Brands reported mixed results for 1H25, underperforming management and SBGSe expectations. While the core business, Leading Brands SA, demonstrated resilience, non-RSA operations showed volatility. Menu inflation provided some support; however, an unfavourable product mix and declining volumes hindered performance. CDR maintained momentum, but QSR volumes reflected pressure despite signs of recovery. Store closures increased from 31 in 1H24 to 41 in 1H25, limiting performance due to consumer demand and demographic shifts affecting viability, particularly in the Eastern Cape. The recent focus on consumer-facing technologies, such as self-service kiosks and digital menu screens, is yielding positive results, as initial data indicates increased transaction value.

Post-trading period and outlook: September showed positive trends, with momentum continuing to build in October. Aligning with management's cautious optimism, we expect 2H25E volumes to increase by low single digit, as the benefits of improving sentiment may take time to materialise. That said, easing menu price inflation in 2H25E (c. 4.7%, 1H25A: c. 6.9%) could support volumes. Considering FBR’s recent run (share price, up c. 37% since June24), we believe much of the positive outlook appears priced. However, a better-than-expected improvement in disposable income and a sustained recovery in QSR volumes could sustain share price momentum.

1H25 results key highlights

• Group revenue of R4 017m was up +2% y/y (1H24: +10% y/y). Gross profit was limited to +1.1% y/y (margin: 42.3%, 1H24: 42.7%) due to input cost pressures (coffee, potato, seed oils).
• Operating profit of R371m was flat y/y, margin contracted by c. 20bps y/y to 9.2% (1H24: 9.4%) further limited by higher electricity usage (12.7%) in manufacturing. HEPS of 218cps (below our implied 1H25 estimate of c. 230cps) was up 9.5% y/y, supported by debt reduction and favourable tax charge. DPS of 150cps was up 9% y/y.
• Total restaurants of 2 925 were up by 0.9% y/y and management plans to open 89 (1H25A: 52) new restaurants (mostly in SA) in 2H25E.

We revise our earnings forecasts down, after factoring in the softer 1H25 results and store closures. We now expect FY25E of HEPS 526cps, +13% y/y (previously 555cps +19% y/y) and FY26E of 625cps +14% y/y (previously 650cps +19% y/y). However, we expect a volume recovery, easing input inflation and potential normalisation of product mix to provide support.

After adjusting the discount rate to 10.5% (previously 11%), as well as the forward PE multiple to 11.5x (previously 11.1x) and the EV/EBITDA multiple to 6.5x (previously 6.1x) to reflect improving sentiment, we now value FBR between R68 and R72 (prev R61 to R65). This implies a total return of 10% to 16%, including a dividend yield of 6%. Risks to this investment case include store closures, a slower recovery in QSR volumes and increased competition.

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