Famous Brands 6 month numbers - suspends dividend

Famous Brands delivered and served up six month results yesterday. At face value they are decent results, notwithstanding what is always a tough operating environment. The group have successfully transformed themselves into a food production business, along with the old core distribution and franchising front end. Production means that you can control the quality inside of the brands that you have acquired, something that becomes increasingly hard to do across multiple brands and many more stores. The group now has over 2600 stores of your good old favourites, and your new favourites too. The tried and tested Mugg & Bean to Debonairs, alongside the likes of Tashas. I mean, who do you know who doesn't like Tashas?

Numbers quickly, revenues increased 23 percent to 2.45 billion Rand for the first half, operating profit (before exceptional items) increased 17 percent to 404 million Rand. Operating margins contracted as a result of higher internal investment to improve operations, as well as incorporating the lower margin production businesses. Making and selling cheese and meats to yourself is a lower margin business, it is more steady and about the controls. It has been a busy first half, with the acquisition of Salsa Mexican (damn delicious stuff), Lupa Osteria (anyone eaten there?) and of course the french fries spot, Lamberts Bay Foods.

The group also invested in a tomato paste facility, Cape Concentrate in Coega. For what it was built for, and never used, and for what Famous Brands got it for, genius. Since the half year has ended the group has also acquired just under half of By Word of Mouth Catering as well as landing the "big one", Gourmet Burger Kitchen (see below). I used to fish with an old Norwegian ship captain (on a smallish boat relative to what he was used to) who was a little like Captain Ahab, always searching for a monster fish that managed to escape us. In his deep Norwegian accent he always used to refer to the "big one".

The big news is that the company is suspending the dividend for the time being, with all likelihood that they will resume in the next financial year. Whilst this may be a bummer for those who like the yield, they have traditionally been very generous with 1.3 to 1.35 times dividend cover, this is still a growth business. And added to that, they don't like to leverage up too much, perhaps some hard lessons were learnt in the past. It is difficult to believe that this business has been listed for around 25 years and that the history is nearly 50 years long.

Perhaps the family types who got 405 cents per share (less tax) have squirrelled more than enough for the next few years. It is pretty easy to work out, there are nearly 100 million shares in issue, if the company doesn't pay 4 Rand a share, they "save" themselves 400 million Rand. That is less money they have to pay externally and more money to service the debt associated with the big transaction done in the UK. That is of course the Gourmet Burger Kitchen (GBK), which was acquired for the princely sum of 120 million Pound Sterling. 80 stores. You do the math, that is a "big number".

GBK EBITDA for the last year was 9.6 million Pounds, they (Famous Brands) are paying 12.5 times EBITDA. For comparisons sake, Shake Shack (Yeah baby!!) had annual revenues of 224 million Dollars (183 million Pounds) with a similar store footprint, with 25.2 million Dollars EBITDA, the market cap is 1.21 billion Dollars. So .... the market in the US pays 4 times more for Shake Shack than Famous Brands paid for Gourmet Burger Kitchen. Obviously the one is Shake Shack and Mr. Market are expecting HUGE (You-J) things, the brand may be small, yet it gets high profile mentions. Shake Shack are set to get to 107 stores by the end of this current financial year.

The expansion plan for GBK will be local (in the UK) and then into Ireland (half of which is Europe), before heading off to the mainland. And I am pretty sure that the brand will land up here at some stage. I was talking to a fellow who is heavily invested through a private company in the food and beverage entertainment space (read restaurant and bar) here in South Africa, he suggested that the gourmet burger space here locally was saturated, he did say that RocoMamas had done a great job. Stop yourself, count the calories! Remembering that Spur own half of RocoMamas, you could say that it was the one that "got away" from Famous Brands. Steers could shake things up a little, have two separate brands I guess with gourmet shakes and burgers if they wanted.

And then lastly, Paul's are set to open here (literally here in Melrose Arch) in late February. That is an exciting development, the bakery's are incredibly delicious. I have seen and been to several in France, they have an amazing feel and look, so fresh and clean and freakin' delicious. Again, don't count the calories or you will get depressed. What to do with the stock? Hold it, even through the "no pay" zone, it is for good reason that the dividend is likely to be suspended all the way through next year and into the year after. Another big growth phase and consolidation is afoot!