Durban – Africa's largest branded food service franchisor, Famous Brands, saw its share price slide more than 28 percent since the beginning of the year, despite the group making six good acquisitions last year.
The group traded at R153.31 a share on the JSE on January 3, but on Wednesday afternoon the share price had fallen to R119, losing 28.83 percent in just more than six months.
Industry analysts attributed the decline to multiple factors.
Ashburton Investments fund manager Jason Forssman said at the end of last month Famous Brands reported a decline in headline earnings of 21 percent.
“If you exclude the acquisition costs related to the R2.1 billion acquisition of UK-based burger chain, Gourmet Burger Kitchen (GBK), earnings a share would have shown a decline of 4.1 percent. This is in contrast to multiple years of double-digit earnings growth which endeared the company to South African shareholders,” said Forssman.
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He said the recent decline in the share price reflected risks in the change of the group’s strategy from a pure franchise model to include company-owned restaurants, as well as a depressed underlying economic environment squeezing the target consumer’s discretionary spend.
36ONE Asset Management analyst Shmuel Simpson
said the shares had been
under pressure due to multiple factors.
“For starters the consumer has been under severe strain with less disposable income to spend at restaurants. There is also concern about the GBK acquisition and whether they overpaid for the asset.
“It will take time to see if the growth materialises. There has also been a general de-rating of smaller illiquid shares, which may also be putting pressure on the share price,” said Simpson.
Mergence Investment Managers investment analyst Nolwandle Mthombeni shared the same sentiment.
“The main catalyst for the de-rating of the share price is the acquisition of GBK in which it paid a hefty premium for the business. The acquisition is a corporate-owned model compared to a franchise model (meaning this will dilute margins and will require capex for growth).
“And lastly the acquisition was funded fully through debt and the dividend was suspended in order to repay the debt,” said Mthombeni.
She said this acquisition not only deviated from the norm of Famous Brands’ history but it would generate lower returns due to being a lower-margin business and capital intensive. “To top it all it is in a region that they have not performed well in, with the likes of Wimpy UK. The market is likely taking this view from a valuation perspective.”
Despite the challenges the analysts were still confident about the business going forward. Forssman said: “Famous Brands remains well-managed, has a diversified portfolio and a track record that suggests an ability to navigate successfully through its current challenges.
“The market is expecting a material improvement in earnings off a low base.”
Simpson said: “Famous Brands is an excellent business with great management and a fantastic business model. However, it is not immune to the difficult economic conditions and may take some strain as the economy struggles. The GBK acquisition should begin contributing more meaningfully to earnings.”
Mthombeni said we could expect the South African portfolio to deliver mid to high single-digit growth and to outperform peers due to the strong brands and diversity of the portfolio.