Preparing to feast

#themes: off-premises dining versus on-premises dining

Famous Brands (FBR) is one of Africa’s leading quick service (QSR) and casual dining (CDR) restaurant franchisors. FBR holds the second highest market share (7.4%) in the SA consumer food service sector in South Africa with the most diverse store footprint and a stable portfolio of franchise partners. The group has a portfolio of established brands (Steers, Wimpy, Debonairs and Mugg and Bean) supported by a vertically integrated business model which supports economies of scale and provides an element of predictability.

Restaurant sales are forecast to grow at a CAGR of 14% over the next 5-years, as off-premises dining visits are expected to outpace on-premises as consumer prioritise convenience and affordability. We therefore believe that QSRs are better positioned to respond to these trends. FBR’s QSR stores comprise 70% of its SA store network, which in our view, could provide resilience despite a challenging environment. Moreover, we believe FBR’s diverse menu options across various food categories, shields the group from supply chain challenges in isolated food categories (e.g., chicken).

Our geolocation analysis reveals FBR’s extensive store network (largest in South Africa), a competitive moat, in our view, in a highly fragmented sector particularly considering the entry (and exit) of various international brands. Our geolocation analysis shows that 27% of Famous Brands’ QSR network does not have a significant fast-food competitor within a 5km radius. Within the CDR network, 11% of stores have no significant casual dining competitor within a 5km radius. Of the major categories, we find the group has a noteworthy advantage through its Debonairs brand in the Pizza category as 31% of stores have no significant competitor within a 5km radius. In our view, this allows the group to be a price setter in certain categories further aided by brand loyalty and resonance. 

Famous Brands has generated stable cash flows, historically. We believe this stems from its stable portfolio of franchisee partners (> 60% of franchisees have been with FBR for >5-years). In our view this suggests the majority of FBR’s franchisees have acquired adequate knowledge and experience to drive local insights and growth but are also less reliant on the franchisor for support.

Management has reduced debt by c. ZAR2bn over the last six years within palatable levels (ND/EBITDA: 1.3x vs. recent FY21 peak of 3x), though where feasible over the medium term could gradually reduce debt in the absence of acquisitive opportunities. In our view, creating room for dividend growth and upside potential to SBGSe c. 6%, 12-month forward dividend yield. That said, management is yet to disclose a concrete dividend policy.

We initiate coverage of Famous Brands with a fair value range of R76 to R89, providing an estimated total return range of 18% to 37%, including a 6% dividend yield. We forecast diluted HEPS of R4.63 (30%) in FY:23E and R5.42 (+17%) in FY:24E and a DPS of R3.01 (+50%) and 3.52 (+17%), respectively. Should management achieve group operating margins ahead of SBGSe at c. 20% by FY26E our analysis suggests 23% upside relative to the mid-point of our fair value range. 

Risks: Limited pricing power in a high inflationary environment may weigh on margins, while frail consumer demand and weak franchisee health, coupled with higher stages of load-shedding, could soften revenue growth. Sustained momentum of food aggregators intensifies competition potentially redirecting demand from the group's brands.

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