TRADE OF THE MONTH: Famous Brands vs Spur
Famous Brands may have bitten off more than it can chew
For well over a decade Famous Brands has done its shareholders proud — and it will probably do so again in future — but right now, it is a share to approach with care.
Caution is called for when any company announces it has "transformed" what has been a hugely successful business model. In October last year Famous Brands did just that when it closed a £120m deal that brought on board UK premium burger group Gourmet Burger Kitchen (GBK) as the 28th brand in its line-up.
GBK does indeed represent a radical break with Famous Brands’ traditional franchising model, built on power brands such as Debonairs Pizza, Steers, Wimpy and Mugg & Bean. With GBK, Famous Brands has entered the complex, big capex realm of corporate-owned stores on a grand scale. For the cautious investor wanting exposure to the fast-food and restaurant sectors, it suggests that the way to go at present is to be long of the 14 p:e Spur Corp and short of the 18 p:e Famous Brands. GBK has left Famous Brands with a heavy dose of financial indigestion. The deal resulted in Famous Brands’ balance sheet swinging from an ungeared position into one sporting debt of R2.86bn and a net debt-to-equity ratio of 165%. Surging debt ramped up net interest charges from R8m in the first half of Famous Brands’ year to February to R184m in the full year. This, together with costs of R106m related to GBK’s acquisition, left headline EPS down 21%. Acquisition costs will be gone in the current financial ye...
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