Famous Brands – Biznews assessment, CEO’s insights

Bit of an experiment for us – a to-camera opinion piece by yours truly followed by perspectives from the CEO of the company whose stock is under consideration. It’s almost 20 years since Famous Brands listed on the JSE. Under the guidance of Kevin Hedderwick, it has handsomely rewarded shareholders. As you’ll see as you watch the video (or read the transcript) the stock enjoys a premium rating. Question now is whether than can be sustained – and if not, should one be buying in on any dips. – AH 

ALEC HOGG:  Famous Brands is one of those stocks you wish you’d discovered years ago.  I was looking through their share price graph (below) going back to the listing in 1994.  Had you bought the stock 11 years ago, you would have made 60 times return on investment.  Had you bought 10 years ago, it’s up 29 times. Up 29-fold in ten years.  What more can you say?  The market loves the stock.  They expect a whole lot from (CEO) Kevin Hedderwick and his team.  He has delivered so far.  We have seen margins in this most recent period, growing from 18.5% to a record 20%. I think that’s the figure most people have been looking at.  Grow margins and grow revenue…you have a powerful combination. The move into Nigeria with the acquisition of Mr Biggs: it would be interesting to see how that one goes.  There’s obviously big scope there, as well as a few challenges. 

famous brands

Here in South Africa, there’s a little bit of a question mark over whether Burger King is going to be eating into Famous Brands’ share.  At last, we now have a serious international competitor.  What would worry me about the stock is the rating.  It’s on a 27 PE, which is telling you that the price is pretty full and it’s also telling you they’re going to have to keep growing at 20% per year to justify it.  So far so good, though.  Kevin is old enough to know that he won’t be making some spectacular forecasts, but his moving out of a hands-on role to a more strategic executive role is going to be doing this company quite a lot of good.  They need to now think more and maybe do less, if they’re going to afford, or be able to reward shareholders who’re buying in on this rating.  For me, I’d probably be holding off a little while…waiting for the share price to come back a little. But I think everybody who’s done that in the past ten years on Famous Brands have probably found the shares have run away from them.  It is a stock, which I’m sure you wish you had in your portfolio.  If you don’t, on any dips, it’s one to add.

KEVIN HEDDERWICK:  Famous Brands today announced what we think are some really strong results, driven by the fact our revenue’s up 12%, profit before tax is up 23%, dividend up 20% to 300 cents per share, and our headline earnings per share up 20% to 406 cents.  I think that performance has really been masked by the fact that we’ve driven our turnover up 12%.  There’s been a nice 17 percent in growth profit and I think in these really tough times, we’ve done a phenomenal job of containing costs, particularly in the inflationary environment – so overall; it’s a great set of results.  In terms of margin, we achieved an operating margin of 20% versus last year’s 18.5.  It’s been a long time coming.  The market often asked me in terms of our ability to generate a 20% margin.  In the past years, we’ve turned in of the order of 18’s and 19’s. 

We set ourselves the goal of getting a 20% operating margin by next year, so we’re one year ahead of time.  We’re very proud about the operating margin number.  Famous Brands is a business that really virtually been on a 20-year trajectory, in terms of growth.  This time around, it’s our 13th year of record turnovers in profits and what we this year – in November this year – is we actually celebrate 20 years since the business first listed in 1994.  If I can just talk a little bit about some of the milestones along the 20 years…  In the last 20 years from a revenue perspective, this business has shown a 22.4 percent compound growth in revenue and a 25 percent compound growth in operating profit.  The share price has been phenomenal.  It’s at 23.4 percent growth in share price.  It listed at R1.45.  This morning we’re trading at R109.00, and that’s translating into a market capitalisation of in excess of R10bn. 

When the business first listed it was a mere R36m. 

It’s been a wonderful journey and I think these results speak to the fact that this business has delivered in terms of the type of things we’ve spoken about for the last two to three years.  What we’ve spoken about in the past, is the fact that Famous Brands as a business is all about building capability.  We speak about building capability across our businesses with regard to building capability leadership, building capability in franchising, building capability in manufacturing, and doing the same thing in logistics.  What we’ve also seen again is the highly cash-generative nature of this business.  We sit in a business today, where we have a balance sheet that actually has no debt on it whatsoever.  In fact, we’re cash-positive at the moment. 

As a result of that, what we’ve done is – you’ll see in the SENS announcement made earlier today – we talk about step change, which Famous Brands is about to embark upon and I just want to elaborate a little bit in terms of what that step change means.  For as long as we’ve been around, we’ve really been trading in this food services space.  What we did last year is we did a very deep evaluation of the Famous Brands business and coming out of that, we identified that what Famous Brands is pretty good at (we think), is that we think we’re really good at being involved in the retail industry.  We understand logistics.  We understand manufacturing.  We know how to build brands and we have some fantastic people in our business. 

Underpinning that theme is really the strong balance sheet issue where we now have the ability to pay down debt, to pay off debt quite quickly, and that’s in relation to the highly cash-generative nature of the business.  What we’re suggesting right now is to say; is there an opportunity for Famous Brands to – notwithstanding its presence in the food business category – is to cautiously embark on expanding the competitive landscape.  To that extent, we’ve identified the new landscape as being leisure, so Famous Brands is about to look at its ability to trade outside of its comfort zone in term so food services.  The way we describe leisure is probably a combination of hospitality, beverages, FMCG (fast-moving consumer goods) and if we’re really brave, to even get into the retail space.  That’s where we want to be taking the business long-term. 

However, not for one moment abandoning our food services business where we still think there’s strong runway for growth in terms of acquisitive growth, by continuing to acquire what we think are ‘best in class’ franchise brands, by making sure we continue to deliver what we call organic growth, or like-on-like growth for our existing franchise partners, and numeric growth.  The target this year is to open 300 new restaurants across the South African and African landscape and then, to continue to look at what we call low-hanging fruit in terms of our manufacturing business.  We’re embarking on – possibly, later this year – manufacturing our own serviettes, which is currently being outsourced to a third-party vendor.  We go through three-hundred-million serviettes per year in this group, so it’s a part of the business we think we should be doing ourselves. 

On the logistics part of our business, there are some opportunities for us to take back what we call outsourced third-party distribution.  We’ve outsourced a part of our Gauteng frozen business for probably the past seven or eight years.  It’s a business, which is worth about R400m in terms of revenue, and currently been done by another third-party vendor called Vector.  The problem is that Midrand currently has a capacity problem, so if you look at the capacity Midrand…  One of the opportunities is to open up another depot – or a satellite depot as we call it – out in Polokwane so we can move some of the volume out of Midrand, take the heat of Midrand, and take some of that business back.  Overall, we’re in a great space.  I think the business is rock solid in terms of its core business and then of course, there’s this exciting opportunity to want to tiptoe out of the food service into the leisure space. 

In that respect, what we’ve done from a structural perspective, is that earlier this year, my title was changed to Group Chief Executive and we installed another colleague of mine – Darren Hele as the CEO of Food Services.  Darren will now be responsible for the day-to-day operational part of the business.  My role will change in terms of being much more strategic and looking at the business long-term in terms of acquisitive growth, strategic growth, and how we can set Famous Brands up on a path where it can continue to grow for the next five or ten years.  Overall, I think this set of results are a great set of results, but I’d like to say there’s a lot more still to come

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