Famous Brands trading update - strong earnings growth

11-OCT-16

Famous Brands have released a trading update ahead of their results on the 24th of October. Those should be exciting, we were discussing Kevin Hedderwick the other day, in person he always downplays his role (a good characteristic), those who have dealt with him suggest that he is really good quality. Not just a chap from East London, someone who has certainly changed a mom and pop type business into a professional outfit with multiple irons in the fire. Recognising that there is a food revolution afoot, they also want to control the supply chain from top to bottom. Controlling the quality of all the ingredients will be key to the consumer coming back and back time again. My wife often tells my kids about her dad's saying, it is not how many people come, it is how many people come back. Quite right.

What is also quite cool about this business, is that according to the last annual report, individuals own one-third of this business. The biggest institutional share holder is the PIC with 10.63 percent of this business. The business was founded back in 1969, it has been around for an absolute age. It has been professionalised over the last 15 years, Kevin was appointed as the managing director of the Steers brand in Feb 2000, he came from a food and beverages background including SAB (as it was back then), Foodcorp and Distell. The family, Halamandaris and Halamandres still own 28 percent (more or less) here. With a market cap of 16.68 billion Rand, as at close last evening (around 100 million shares in issue), the life work has turned into 4.67 billion Rand. And 113 million Rand (before tax) of dividends a year at current levels, forget what they paid for it!

I thought that this was supposed to be about the trading statement? Quite right. Let us do a copy paste of the two exceptional items:

    "- a R141 million derivative gain on the call option that was utilised to hedge the purchase price of the acquisition of GBK Restaurants Ltd. in the United Kingdom, of which details were published on the Stock Exchange News Service ("SENS") of the JSE on 1 September 2016; and

    - a R20 million impairment of the investment made in 2013 in UAC Restaurants Ltd. in Nigeria."


Of course, as Michael points out, if that hedge isn't closed then they are in a bad way now, they have closed that deal, effective date was the seventh of October. I guess that they may have lost some money there. We will have to wait and see how the market reacts. Headline earnings per share are expected to be 67-74 percent higher than the comparable first half, 403 to 419 cents per share. Before exceptional items, HEPS is expected to be around 10 to 14 percent higher, more reflective of a tougher operating environment, that range is 264 to 275 cents per share. The next two reporting periods will include the full integration of the gourmet burger business in the UK. We wait for the half year results on the 24th.