Famous Brands trading update, very good

This morning we had a trading update in respect of the full year ended 28 February 2013 from Famous Brands. Now these guys have had a very busy year where they have bought a 60% controlling stake in Java Lava Beverage manufacturers, entered a JV with Coega Dairy company, bought the franchise rights to Europa and Fego Caffe and bought stakes in Turn and Tender and The Bread Basket.


"Accordingly, shareholders are advised that the Group expects to report headline earnings per share (HEPS) and earnings per share (EPS) (calculated on an IFRS basis) of between 336 cents per share and 342 cents per share. This is an improvement on the prior year comparable HEPS and EPS of between 21% and 23%."


If you take the middle of the range 339c the company is trading on 26 times this years earnings. That is very expensive for any business. Is this justified? Well the business has a great model with very good margins for the franchise division. That division then locks in a long term client to their supply chain. It is a two edged sword but in a good way.


There are a few questions to be asked here. Why are they doing well while many retailers are struggling? Are they a defensive business and can they maintain this growth? The answer to the first question stems from the fact that they are well diversified amongst income groups. In fact you would probably find that fast food is a luxury way out of the reach of the lower income groups and these are the people who have been struggling the most of late. Even if our consumer is weak, fast food is still coming off a low base in this country and still has legs to grow. People love it and it really is a luxury many do not appreciate. I definitely don't think it is defensive, we can see that from McDonalds latest performance in Europe. If the South African consumer was strong they'd be doing even better.


Can they maintain this growth? I think the short answer is yes. More than half the country cannot afford their offerings. As this changes and people enter the realm where fast food is a weekly occurrence, Famous Brands with the best brands in the country are perfectly situated to benefit. As you can see from their latest acquisitions, they are gaining more and more exposure to the sit down market which has higher input costs for the franchiser but also has higher margins. They are also building nicely on that supply chain. We are not scared of the lofty valuations and continue to add to this one.