1H24: Palate cleanser into 2H24E
#themes: load-shedding, alternative power supply, franchisee fee relief
Famous Brands (FBR) reported their 1H24 results reflecting group HEPS down -7.1% y/y to 199cps, in line with management guidance, albeit c. 11% below SBGSe as costs tracked ahead of our expectations. Excluding franchise fee relief and diesel costs, we estimate that HEPS would have been up c. 2% to 216cps. Moreover, other factors that weighed on FBR’s interim performance were input cost inflation (GP margin down 200bps), higher insurance premiums (+470% y/y), and an increase in net finance charge (+85% y/y) due to higher interest rates (+275bps) and debt facility drawdown. Consequently, 1H24 profit margins contracted by 160bps. We lower our future value valuation range (FVVR) to R67 to R76 (29% to 37% - total potential return inc. DY of 8%) from R69 to R81 previously, considering peer valuation multiples compression. However, we apply moderate earnings upgrades in anticipation of an earnings recovery in 2H24E as load-shedding intensity is expected to improve, reducing the negative impact to earnings (1H24: franchisee fee relief c. R11.6m, diesel costs net R11.9m, generator repairs, and lost revenue on restaurants without alternative power supply (APS)).
Group revenue was up +10% y/y (ex. load-shedding franchise fee relief: +11.2% y/y) and +24% versus 2019, as consumers appear more resilient than expected despite menu price increases and a highly competitive environment. Management notes that growth in transaction value has slowed, reflecting pressure on disposable income. Footfall at malls with APS is recovering, supporting casual dining restaurants. c. 18% (Mar23-June23: c. 16%) of sales were generated during load-shedding hours across the group. As at the end of Aug’ 23, 91.3% of leading brands had APS (Mar23: c. 81%) and it is expected to improve to 95% by end of year. Restaurants without APS showed a decline in sales (-5.6%) while restaurants with APS generated sales growth of c.+10%.
Post period end trade in September and October 2023 has been below management's expectations, potentially attributable to various global sporting events which tend to support at home consumption. We expect pricing to support revenue growth, as October/November price increases take effect, likely ranging from 6% to 7%. Our assessment suggests that price increases of more than 10% could be demand-destructive.
Minor earnings adjustments: Factoring in the update, we adjust our HEPS estimates to reflect APS capacity improvements (limiting lost revenue) coupled with, lower sales generated during load-shedding hours (improving franchisee fee earned), and better than expected performance in the UK and retail division. As a result, we upgrade our FY24E and FY25E by c. +2% y/y and +3% y/y, respectively. We highlight the following risks to our investment case: (i) sustained pressure on disposable income, (ii) intensified competition, (iii) extension or increase in franchisee fee relief and (iv) cost push inflation.