THE emphasis in yesterday’s column on ( ) was mainly on how it was countering the trading environment in the sector in which it operates. I briefly mentioned that its low debt:equity of 22% provided ample capacity to grow organically and to acquire other businesses.
Effective from September 1, Fambrands bought the Mugg & Bean South African operations for cash of R104m. The cash settlement, according to the interim report for the half-year ended August 31 2009, was to have been paid on November 1, just a few days ago.
The directors reported that the company planned to open nine new Mugg & Bean restaurants and revamp eight in this financial year.
When the acquisition was reported on July 27, two main financial implications were reported.
The first was that initially earnings and headline earnings per share would be neutral. This tells us that Fambrands’ management is confident that it can improve return on the assets.
The second was that the debt:equity ratio was expected to increase to 56%. When the Mugg & Bean deal was reported, Fambrands CEO Kevin Hedderwick said the company was comfortable with this debt level, given its strongly cash generative operations
Looking at its six-year review, from the financial years 2005 to 2009, I noted that the company’s debt:equity ranged from a peak of 80,9% at the end of 2004 to a low of 7,0% at the end of 2007. In the other years it was between 30% and 46%. Historically, the company has managed its financial gearing efficiently.
I reminded myself that I wrote yesterday that Fambrands’ debt:equity was 62% at the end of August this year. Over the half- year its strong cash flow had enabled it to repay interest- bearing debt of about R130m. On its historic management performance, cash flow could be more than adequate to pay for the Mugg & Bean franchise, but don’t expect debt:equity to be much lower than 50% at the February 2010 financial year-end.
Sweating the new assets and implementing its plans for more outlets for its existing brands will be a costly exercise.
This is why the market share and the market sector as a whole is integral to its investment fundamentals. Just this morning I read Stefan Stern’s Open Column in Business Day on Little Chef. This motorways services dining chain in the UK had travelled downhill before embarking on a new strategic plan to accelerate uphill again. Stern observed, admittedly from just one case study, that much money and effort has not put the chain into the right gear yet.
I’m more confident on Fambrands’ strategy, planning and management capability and the trading environment than I am on those of Little Chef’s and its environment.
I’m not, however, confident enough to forecast that headline earnings will grow more than 10% in the 2010 financial year — a guesstimate of 175c. On this shaky guesstimate, at the present share price of R24, the forward price:earnings ratio is 13,7, the earnings yield is 7,3% and the dividend yield could be 3,6%. The share appears fully priced.
The market is much more optimistic than I am and seems to expect bumper profits when the football fans arrive in the financial year 2011.
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