Pricing strategy in focus amid cost inflation

#themes: beef prices, employee costs, AME

Famous brands 1H26 results were mixed reflecting topline growth (QSR growing ahead of CDR in line with sector) and limited margin expansion (c. 10bps y/y) due to drag in subscale operations (signature brands, AME + UK), input cost pressures (beef + coffee) and a rise in leading brands employee costs (c. +20% y/y) following the reinstatement of STIs, which had been deferred in 1H25 amid a softer trading environment. Manufacturing was the key driver as margin improved benefitting from price and mix albeit coming off a low base. Additionally, a lower finance charge supported earnings. Cash conversion (CFO/EBITDA: FY25: 95% vs historical avg. c. 96%), a key metric for franchise business model, remained broadly in line with historical levels, somewhat attesting to the health of the franchise partners, in our view. We believe the prolonged recovery in earnings to pre-GBK levels (FY16), coupled with a slower recovery in discretionary spending, could continue to temper investor sentiment, keeping valuation multiples toward the lower end of the historical range. However, the group’s extensive network, across both QSR and CDR in SA, positions FBR for growth upon the firm recovery of the macro-environment, in our view.

1H26 results highlights:

• Group revenue was up 5.6% y/y (SBGSe: +6% y/y) with operating margin up 5.8% (SBGSe: c. 13% y/y) translating to margin expansion of c. 10bps y/y to 9.3% (ex. beef cost c. R30m incurred in 2Q26, 1H26 margin could have been c. 10%).  
• Leading SA margin was down c. 270bps to 48.1% while Supply chain (Manufacturing + Logistics + Retail) expanded by 30bps y/y to 6.8%. HEPS of 235cps was up 8% y/y aided by a reduction in finance charge. DPS was up 8% y/y. 

Beef cost pressures could persist into 2H26E, driven by foot-and-mouth disease related supply shortages. FBR plans to implement selective price increases in November to mitigate rising input costs (1H26A: no price hikes). While this action could temporarily soften volume momentum, festive season traffic may help cushion the impact, in our view. We forecast price inflation of c. 5% in 2H26E (1H26A’s 4.4%). At a sector level, a modest uptick in pricing in Aug-25 across both QSR (4.8% vs Jul-25: 4.3%) and CDR (5% vs Jul-25: 4.3%) segments suggests that peers are adjusting prices to recover higher beef costs.

We expect sub-scale operations (Signature brands and non-RSA, barring SADC) to remain under pressure in 2H26E. SADC performance is promising, and we understand FBR has ambitions to double the business within the medium term. If achieved within the next three years, we estimate it adds c. R2 per share to our valuation, all else being equal.

We have trimmed margins across all segments to reflect 1H26A performance. However, we remain relatively optimistic on manufacturing margin due to improving production yields despite cost pressures. Logistics margin while nascent, 2H26E likely to show an expansion as 1H26A was impacted by once-off relocation costs. Leading Brands’ margin contraction is likely to narrow in 2H26E relatively to 1H26 but we note potential volume risk following the planned price increases in a highly competitive, value-seeking consumer environment. We now forecast FY26E and FY27E HEPS of 578cps (+11% y/y, previously 618c) and 667c (+16% y/y, previously 729cps).

We revised our FVVR to R58 – R68 (from R66 – R70), implying a total return of c. 13% - 31%, including a 7% dividend yield. Key risks include slower consumer spending, rising competition and beef prices, AME, UK + signature brands drag.

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