Spur vs. Famous Brands: A Showdown Between Two Restaurant Giants

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SIMON BROWN: Today, I’m chatting with Keith McLachlan from Element Investment Managers. Thanks for joining me this early morning. Let’s dive into Spur’s results—they’re quite remarkable. While they report revenue growth, I’ve noted a minor stagnation in foot traffic. However, they’re successfully increasing customer spending and expanding their store footprint across various brands. In what is evidently a tough operating climate, Spur is managing to excel.

Read: Spur announces a 40% dividend increase.

KEITH McLACHLAN: Good morning, Simon. You’re right. One major highlight that may have slipped by is their substantial dividend increase. They’ve raised it by 40%, and notably, they are not distributing all their earnings. Their payout ratio is about R3 per share, compared to earnings of around R3.40.

In summary, these figures are solid and backed by robust cash flow. Spur is adhering to its core strategy while steadily broadening its store network, with about 60% of earnings coming from the Spur brand.

Some other brands are faring well, while others aren’t performing as strongly, but this is common in the QSR (Quick Service Restaurant) casual dining sector, where results can often vary.

I believe Spur is thriving, especially with the new management team injecting fresh energy and vision for the next decade or two.

SIMON BROWN: You’ve made a great point. In the QSR and casual dining industries, experimentation is key, and there are no guarantees for success. It’s wise to approach cautiously, as some initiatives may yield significant results while others may quietly fade away.

KEITH McLACHLAN: Exactly. If you compare Spur with its direct competitor, Famous Brands— which almost has double their market cap and includes brands like Steers, Debonairs, and Wimpy—you’ll see that Famous Brands has a much more diversified portfolio. However, they haven’t performed as well.

Diversification doesn’t always lead to success; while Spur maintains a more concentrated portfolio, its core brand excels, particularly in the family casual dining space. They have a strong presence during breakfast, lunch, and dinner, which is essential for their success.

SIMON BROWN: I’d like to return to Famous Brands in a moment. One last question about Spur: despite over a 7% rise yesterday, it doesn’t seem overpriced. Its PE ratio is around 11, and it offers a dividend yield of nearly 9%, coupled with a strong balance sheet. Even after the significant increase, it remains reasonably valued.

KEITH McLACHLAN: No, not at all. Traditionally, such companies tend to trade at higher multiples since establishing a successful large-scale franchise network is quite difficult. Once attained, you can expect excellent capital returns.

Spur boasts a 30% return on equity, generates well-supported cash flow, and substantial dividend payouts, despite ongoing growth, thanks to their net-cash balance sheet. They are not heavily indebted.

Listen: How QSR giant KFC secures sites in SA.

Therefore, Spur is certainly not an overpriced stock and offers a comparable value to Famous Brands at this point in the cycle. However, Famous Brands faces an entirely different situation with its brands and a balance sheet laden with debt, making Spur seem relatively inexpensive, even after recent movements.

SIMON BROWN: Famous Brands used to be a stock to watch about a decade or even 15 years ago, around 2010—a great topic for regular discussion. I owned it, and I think you did too. It was certainly the stronger player back then, and now things have shifted. This emphasizes the need for investors to keep a close eye on even the so-called ‘strong’ stocks, though we might debate the current outlook for Famous Brands.

Famous Brands faced challenges in the UK. They’ve encountered significant hurdles, and now Spur has taken the lead, which demands tough adjustments from investors.

KEITH McLACHLAN: Indeed. If we reflect on the S&P 500 over the past century, only about five of the original stocks still exist, showing a mere 1% survival rate over 100 years. Not every business should be treated as a long-term hold, regardless of popular investor wisdom. Famous Brands is an example of this.

A decade ago, they made the ill-fated acquisition of Gourmet Burger Kitchen in the UK, which marked a peak for Famous Brands. This decision resulted in significant debt, leading them to reverse the acquisition while still managing their existing debts. This situation has hampered their ability to invest in their South African operations.

In contrast, Spur has adopted a conservative approach with a net-cash balance sheet and a focus on returns. Famous Brands, however, was leveraged with debts and faced greater operational risks. This strategy can seem beneficial in a booming market but can lead to serious setbacks during downturns, which Famous Brands has undoubtedly faced. I think they are beginning to recover now.

Amid all this, a new management team at Spur is paving the way for its future, outpacing Famous Brands, even though it’s smaller.

SIMON BROWN: You’ve made an excellent point. While leverage can be beneficial, it can also backfire, creating challenges in downturns. Famous Brands peaked at nearly R150 back in 2016, and now it’s down to R58.

Thank you, Keith McLachlan from Element Investment Managers, for your early-morning insights.

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