Famous Brands half year results are pleasing

Famous Brands released results yesterday morning, and as luck would have it, I actually got to meet the CEO Kevin Hedderwick on CNBC's Power Lunch and then we chatted a little in the corridors afterwards. Now we don't own many of these shares for clients, but we have enough to warrant more than just a keen interest. He seems like a good guy, has energy and has a handle on the business that he runs. The only question that I should have asked is what are the main shareholders thinking, what are their plans? Darn, that one would have been the one to ask. More on that chat a little later, let us dive into the numbers.


For such a presence the business is small, but remember that their primary business is franchising, but that is changing subtly. Total revenue for the half year clocked 1.183 billion Rands, with total operating profit as close to half for the last full financial year as you can get, 206.6 million Rands. Yes, that really is the full extent of this business. But as you can see, very profitable, franchising has operating margins of 58.8 percent. Wow. Headline earnings for the period clocked 145.4 million Rands, which was a very healthy 21 percent better than last time. Basic HEPS registered 150 cents, the biggest surprise was a massive 35 percent uptick in the dividend to 105 cents per share. As they mention in the commentary, dividend cover has been reduced to 1.39 times, "which is considered sustainable given Famous Brands' strong cash-generating ability and also compensates shareholders for any dividend withholding tax" After tax the net dividend to shareholders will be 91.8 cents per share.


What amazes me is that the company continues to open stores by the bucket load, expectations are for the company to add 185 stores in this financial year (an extra two in the UK), remembering that these are the half yearly results. That would be on top of the 2048 stores that represent the group across the globe, the store footprint growing at roughly 9 to 10 percent is not to be sneezed at. As they say in the release however, they are finding new customers that were not there already: "In South Africa, previously under-serviced rural areas continue to offer robust expansion opportunities for the Group's brands, whilst heightened interest from prospective franchisees continues to be experienced in the Rest of Africa."

Hey, who doesn't like pizza? Local system-wide turnover increased just over ten percent, but everything north of the border (I presume included in that is the 3 stores in Lesotho and 8 in Swaziland) increased by 33.3 percent. Wow. But, because there are "only" 155 stores in Africa (as per the annual report 2012, page 5), the size relative to group revenue increased from 6.1 to 7.3 percent of total revenue.


So whilst the rest of the African continent comes with some exciting prospects, it is still relatively small to the company. But, and this is where the excitement levels are heightened, like a piping hot thin base crispy pizza with all your favourite toppings, Nigeria has only 3 Famous Brands stores. And this brings me to the informal chat that I managed to have with Kevin Hedderwick, where he said that he had recently visited Nigeria. He said that the people were full of energy, naturally business oriented, hustlers. But more importantly, he said that for every unit of GDP growth in developing markets, this normally translated to double the spend in convenience dining. Less time, more money, more convenience offerings that are value for money means that they would be in the sweet spot.


And that brings me to the last point, the share price is last at 70 Rands. I suspect that the company could make between 330 to 340 cents for the full year, bearing in mind that there is always a stronger second half. Naturally. It is holiday time. On that basis the payout might be as much as 240 cents for the full year. At 70 Rands the stock is trading at roughly 21 times CY earnings, with a dividend yield forward of 3.3 percent. The issues are that there are not many shares easily tradable, outside of the tight shareholder base. According to the annual report, 6 directors hold 38.68 percent of the shares, Coronation holds 28.68 percent and Enderle S.A. PTY Limited owns 5.05 percent. I presume that is Hans Enderle, the fellow who started City Lodge. So, you add up those voting blocks and you have 72.41 percent of the shares. Which means that there are fewer shares around for investors to buy, should you want to build a meaningful position in the company. This is a mid-sized company, a market cap of "only" 6.8 billion Rands. I guess it is not wildly cheap anymore, but the prospects are still just as bright.