FY23: QSR exposure to provide resilience
themes: off-premises, load-shedding; pricing; take rates
We maintain our view that Famous Brands' skew towards the quick service restaurant (QSR) segment (c. 70% of total network) is likely to provide resilience in a challenging trading environment. Management has confirmed that off-premises dining will remain prevalent and drive growth, as consumers continue to prioritise affordability and convenience.
Famous Brands FY23 results exceeded our expectations, supported by beats in both revenue (15% y/y, SBGSe: 13%) and HEPS (488cps versus SBGS: 464cps). Low gearing (net debt to EBTIDA: 1.1x, SBGS, 1.0x) and strong cash generation prompted management to raise dividends significantly (+82% y/y) to 363cps (SBGSe: 301cps). Post the reporting period, March and April performance was lacklustre. May was better with good traffic on Mother’s Day but overall performance is below expectations. We are lowering our earnings estimates by c. 10% in FY24E and 6% in FY25E. As a result, our fair value range reduces by 8%.
Load-shedding, we suspect, was a net positive for the group in FY23, although it has inflicted strain on franchise partners and the manufacturing division (at stage 6, some plants run diesel generators for at least 40 hours per week, diesel costs incurred over FY23 were R14.8m, most of which was incurred over 2H23E (R11.7m)). Into winter, franchise partners will have to assess the viability of trading and burning diesel as loadshedding intensifies, particularly during off-peak trading hours. In response, management will provide financial relief in the form of lower take rates on sales generated during load-shedding hours. Secondly, management aims to roll out smaller store formats and drive-thru restaurants, which we believe will help to improve store efficiency, reduce operating costs and support margins in the medium term to long-term.
GP margin pressure ahead. The ongoing rise in input costs is expected to put pressure on GP margins in FY24E as management will be compelled to absorb elevated inflation in order to protect the profitability of franchisee partners.
We estimate a fair value range for Famous Brands of R69 to R81, providing a total return range of 14% to 32%, including a divided yield of 6%. We forecast diluted HEPS of 489 (0.2%) in FY24E and 589 (21%) in FY25E and a DPS of 343 (-6%) and 413 (21%), respectively.
Risks: If inflation remains sticky, management may be compelled to pass on inflationary pricing more frequently to its franchisees. This could intensify the strain on the health of franchisees, who are already impacted by load-shedding. Additionally, it could further weaken consumer demand and weigh on margins.