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Has Famous Brands caught Spur and Taste napping?

Famous Brands, on a PE ratio of 23.76 is the 800 pound gorilla in the sector.

CAPE TOWN – Famous Brands (JSE:FBR) has taken another step into the world of family dining with its acquisition of the Europa and Fego Cafe chain of restaurants.

This was the second deal announced by the company in a week, the first was its in-house coffee shop deal with Netcare (JSE:NTC), leaving one wondering if its competitors Spur and Taste Holdings (JSE:TAS) are asleep at the wheel.

“I’d guess that companies like Famous Brands, Taste and Spur are all shown the same thing,” says Anthony Clark, small and mid-cap analyst at Vunani Securities (JSE:VUN). “But Famous Brands must be the obvious first choice. They can outbid and pay fast; they have scale and can achieve efficiency just by plugging a franchise into their existing and highly efficient back end operation. When Spur or Taste buy something people wonder why Famous didn’t buy it.”

However, although their acquisition strategy is not as prolific, neither Spur nor Taste Holdings have been napping.

Spur’s acquisition of DoRego’s completed in the beginning of March this year made a notable difference to the group’s year end results to June, despite the fact that DoRego’s contribution was just for four months. Profit before income tax for the financial year increased by 49.9% to R175.1m.

Similarly Taste has benefitted from its acquisition of the Fish & Chip Company, effective from 1 February this year. In the six months to August, Taste’s earnings before interest, tax, depreciation and amortisation rose 47% to R20.6m. CEO Carlo Gonzaga put this down to the continued growth of the food services division as well as the acquisition of the Fish & Chip Co.

Taste is still embroiled in a dispute with the ex-owners of the fish franchise and the matter is set to be heard in court in 2013. Management is confident that the outcome – if it actually goes to court – will be in Taste’s favour.

Aquisitions in the fast food and restuarant business. Click here to view the full list.

Spur is currently trading close to its all time high of R23.64. “Spur was like everyone’s favourite aunt – well loved but with no glamour,” says Clark. “But in the last year she has put on sexy knickers and slowly the market is realising that something has changed.”

The company has investigated several acquisition opportunities, although only one has come off. The Financial Services Board has also recently closed its investigation into Spur and certain directors, following complaints of improper behaviour by a former employee. No legal proceedings have resulted from the investigation, and the market has responded favourably, says Clark.

The casual dining market is competitive. But opportunities are not running dry for the listed franchise companies. “That market is heavily fragmented,” says Anton Solomons, equity analyst with Thebe Stockbroking. Famous Brands, along with competitors like Taste, are not dominant in that space. There are huge opportunities for consolidation, he says.

According to Famous Brands CEO Kevin Hedderwick, current trends show that the food service market is being driven by four major growth sectors: breakfast, coffee, snacking and chicken. “Breakfast is becoming the new dinner,” he says, adding that people don’t necessarily eat breakfast, lunch and dinner as they used to. “People are on the move. They might grab a yogurt after gym, a muffin at tea, and something else a little later. Both Europa and Fego cater to that trend.”

All three companies are prodigious cash generators. “They are all acquisitive in their own way,” says Solomons. They can make acquisitions, or grow their own brands – as Spur did with Panarotti’s Pizza Pasta, and Famous Brands is currently doing with its flame-grilled chicken brand, Giramundo’s.

With the acquisition of DoRegos, Spur has successfully diversified its risk. However analysts and shareholders have criticised the company for not putting its cash-pile to more effective use. “You need to understand the management style,” Solomons says. “They are conservative and growth oriented. Their growth is more about a steady progression – locally and in Africa. Grow too fast they say, and they could put the business at risk.”

For Taste – which is also always looking for the gap in the market – the Fish & Chip acquisition has transformed its growth prospects. “This business will double or treble its returns on a two year view,” says Clark.

The beauty is the simplicity of the Fish & Chip business model. The menu is limited to about six items – which helps keep fraud down and procurement simple; portions are generous and prices are affordable. The locations are in areas of high foot traffic, ensuring high volumes.

“Both Spur and Taste have the ability to double their footprints and revenues, that is why they deserve their ratings (19.92x and 22.61x respectively),” he says.

Famous Brands, on a price: earnings ratio (P:E) of 23.76 is the 800 pound gorilla in the sector. It will find it more difficult to grow, and needs to find ways to generate rising returns. To go from 2 000-odd stores to 4 000 is unlikely. An extra 60 stores just adds to the momentum.

One focus for Famous Brands is to support its food services division. “It has spare capacity and must grow its store base to utilise this,” says Solomons.

Taste has also recognised that a strong manufacturing base is one way to trap additional margin in the business. As a result its focus this past year has been the development of the food service business. Two distribution centres – one in Cape Town, the other in Gauteng – were built and which supply food to the group’s 450 outlets.

All three have different growth vectors, says Clark, and will appeal to different investors. Famous Brands will appeal to the average pension fund manager looking for security and safety. Spur is a safe investment for those who want little risk but healthy dividends.

Taste is an investment more likely to appeal to a younger investor, one that is more willing to take on a little risk in return for rapid growth.

In SA fast food is a good long-term business. Historically it has grown at 10% to 12% p/year. As the country gets wealthier, so the population will eat more fast food. The key for an incumbent is to control their costs and value propositions. “The established majors will always do well – they have the brands and the footprint,” says Clark. “The investors in Burger King need to have deep pockets.”



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