For several years, Steyn Capital Management was betting against fast-food and restaurant franchiser Famous Brands. Now the investment firm, whose flagship hedge fund has delivered an annualised return of 16.7% since 2009, has emerged as a substantial shareholder, disclosing a 5.03% stake in the group after the restaurant franchiser released its interim results last week.
Steyn Capital founder and portfolio manager André Steyn tells the FM that an acquisition spree had left Famous Brands heavily indebted and its management distracted by a collection of underperforming businesses, making the shares an attractive short-selling opportunity.
The turning point came at about the start of the year, when Famous Brands initiated a share buyback programme. Steyn says the move “signalled to us a return to a more rational capital allocation framework”, convincing his fund to close its short position.
His confidence grew further in May, when Famous Brands’ results for the year to February 2026 showed progress in tackling several long-standing problems, including its troubled UAE operations, persistent losses in the UK and underperformance in its signature brands restaurant portfolio.
Steyn says putting these problems behind it will allow management to concentrate on growing and improving the core business. Combined with his assessment that Famous Brands is “pretty much the cheapest quick-service restaurant [QSR] group on the face of the planet that isn’t facing structural decline issues”, the progress was enough to convince his firm to start accumulating shares.
Another major attraction is cash generation. Even after allowing for some temporary working capital benefits, Steyn estimates that Famous Brands offers an underlying free cash flow yield of 12%.
Has Steyn spotted a potential recovery, or merely bought a cheap business with little growth?
The latest interim results hardly suggest a company firing on all cylinders, though the economic fallout from the Middle East conflict has made life difficult for consumer-facing businesses. As Famous Brands CEO Darren Hele puts it, there is “little doubt that fuel price and associated effects have constrained consumer spend and hampered our top line”.
Reassuringly solid
Revenue rose 2.3% to R4.3bn in the six months to August, operating profit fell 4.7% to R375m and headline earnings per share slipped 3.2% to 228c. The operating margin contracted from 9.3% to 8.6%. Yet free cash flow more than doubled to R459m, helped by a sharp reduction in capital expenditure, while the interim dividend increased 4.9% to 170c.
The core business remains reassuringly solid, without being spectacular. South African operations of the leading brands division, which includes Steers, Debonairs Pizza, Wimpy and Mugg & Bean, increased operating profit 1.2% to R241m. The supply chain division, which manufactures and distributes food and other products to franchisees, lifted operating profit 13.3% to R230m.
This vertically integrated model allows Famous Brands to earn franchise royalties as well as manufacturing and distribution margins. Ultimately, however, the profitability of both operations depends on customers spending money at Famous Brands restaurants.
And there has been precious little growth in sales at outlets. Leading brands’ system-wide turnover increased 2.7%, but like-for-like sales grew just 0.8%. QSRs proved more resilient than casual dining operations, where comparable sales actually declined in the second quarter.
Hele attributes much of the difference to affordability, with financially stretched consumers increasingly favouring cheaper, quicker meals over sit-down dining. Nevertheless, he remains confident that there is “runway to recover and improve” as consumer conditions stabilise.
The relative resilience of QSRs is one reason Steyn prefers Famous Brands to fellow JSE-listed restaurant franchiser Spur Corporation, despite Spur’s stronger recent performance.
Its franchised restaurant turnover grew 6.9% in its year to June, compared with 2.7% growth in Famous Brands’ South African leading brands during the latest half-year. While the reporting periods and geographic coverage differ, the figures are consistent with Spur’s stronger recent growth record.
Steyn acknowledges the strength of both businesses. “We’re shareholders in Famous Brands, we don’t own any Spur shares. I think both are really good businesses,” he says.
He recalls US investor and philanthropist Warren Buffett’s observation that an ideal business resembles a postbox into which people keep mailing money. A restaurant franchiser, which collects royalties from franchisees, comes remarkably close to that model, he argues.
But Steyn says Famous Brands offers the more attractive investment proposition, partly because it is cheaper and partly because its greater exposure to QSRs could prove advantageous as food delivery becomes increasingly important.
“In this world where delivery is getting a bigger and bigger bite out of things, I think QSR is more defensible,” he says.
His reasoning is that sit-down restaurants depend partly on selling profitable extras such as drinks and desserts. When customers order food for delivery instead, restaurants risk losing those additional sales.
There is, however, a counterargument. Famous Brands’ convenience-driven offerings face intensifying competition not only from other takeaway chains but also from supermarkets’ ready meals and grocery delivery platforms such as Checkers Sixty60. Spur’s traditional family restaurants offer a dining experience that cannot easily be replicated at home.
Steyn nevertheless cautions against judging the two companies purely on their historical performance. Famous Brands spent heavily acquiring Gourmet Burger Kitchen in the UK and expanding into several foreign markets where, as he puts it, management “really stubbed their toes”.
Those costly distractions weighed on performance, he argues, and their impact needs to be considered when assessing the group’s prospects. With many of those problems now being addressed, management can devote more attention to improving its core restaurant operations, potentially narrowing the performance gap with Spur.
Another reason for optimism is that Famous Brands is emerging from a multiyear capital investment programme to modernise its manufacturing and distribution infrastructure. With the bulk of this spending now complete, capital expenditure should moderate, freeing up more cash for debt reduction, dividends and share buybacks.
Importantly, the investment is also beginning to deliver operational benefits. The supply chain division’s operating margin improved from 6.8% to 7.3% in the latest half-year, reflecting greater efficiency in manufacturing, warehousing and distribution. Management has been bringing more production in-house, where it can supply franchisees at the same or better quality and price, while expanding the range of products distributed through its network, notably beverages.
There are encouraging signs elsewhere in the supply chain business. The retail division, which supplies branded products to supermarkets, reduced its operating loss from R11.6m to R2.1m after improving its product mix and margins. Management expects further volume recovery in the second half.
Famous Brands sees Southern Africa as an important growth market, but Botswana remains a major drag. The diamond-dependent economy is under severe pressure, with like-for-like restaurant sales falling 13.5% in pula terms. Famous Brands’ relatively large number of company-owned outlets magnifies the impact, while Hele describes the outlook as the most uncertain in the group’s 30 years in Botswana.
To reduce its exposure, Famous Brands plans to cut its stake in Botswana’s Retail Group from 51% to 30%, retaining franchise royalty income while removing the business from its consolidated accounts. Despite these difficulties, Hele remains optimistic about the wider region, where seven restaurants opened during the half-year across Zimbabwe, Zambia, Namibia and Eswatini.
Around the world
Elsewhere, Famous Brands is still grappling with underperforming businesses. The signature brands division’s operating loss widened from R7m to R9m, largely because of continued weakness at premium restaurant chain Paul as financially stretched consumers cut back on luxury dining. Management expects some improvement in the second half.
The Africa and Middle East division remains loss-making, though restructuring is beginning to bear fruit. Famous Brands has exited the UAE entirely and is adopting a more capital-light model, converting company-owned restaurants in Kenya and Mauritius into franchises while concentrating future expansion on selected African markets.
The UK remains particularly troublesome, with the Wimpy business slipping into a R3m operating loss amid weak consumer spending and rising labour and other costs. Despite efforts to reduce overheads, Hele is pessimistic about prospects for a meaningful recovery. “I’m probably the most downbeat about that market vs anywhere else,” he told investors.
At about R51.50, Famous Brands trades on nine times rolling 12-month headline earnings, compared with about 11.3 for Spur on an adjusted basis, and offers a dividend yield of 7.6%. Given the difficult consumer environment, Steyn does not expect an imminent acceleration in growth. “We’re not looking to judge them on the next half’s earnings,” he says.
Over the longer term, however, he sees opportunities to expand the restaurant network, particularly through more drive-throughs and outlets in aspirational areas. He is also encouraged by franchisees’ willingness to open new restaurants and refurbish existing ones, which he regards as an important measure of the underlying strength of the group’s brands.
Beyond earnings growth and attractive dividends, Steyn sees the potential for “some sort of a multiple reversion” as investor confidence returns. But, like other consumer-facing businesses, Famous Brands must first withstand the squeeze on household spending caused by the fuel price spike.
