This morning Famous Brands, the fast-foods restaurant group reported its results for the financial year ended February 29 2012. The company reported year-on-year improvement of 15% in bottom-line diluted headline earnings per share to 272c per share from 237c.
This result was no surprise as a fortnight ago the company issued a positive trading update in line with today’s report, and, had I not been diverted from other activities, I would have written on the update on this website. I’ve resolved to be more pro-active in future.
Jean and I bought our holding in Fambrands between June and December last year in a share price between R42 and R44 last year. This holding was part of a portfolio selected for our High Yield portfolio which formed part of the narrative for the now defunct Private Investor Portfolio in Business Day. Readers of that column may recall the share was on our wish-list for several years before we finally invested, but, sometimes we dither. Had we not dithered we could, perhaps, have bought the around R30 a share two years ago. But then the cash kitty was then only large enough for entry into Spar, which was higher on the wish-list.
With our website still in infancy its readership is miniscule. Gradually, therefore, I’ll try to highlight the essentials we use in selecting shares for our portfolio.
The main investment fundamental is how well a company managed its return on the assets it manages – its return on assets managed. The drivers of ROAM is asset turn (the ratio of turnover to assets) and operating margin (the percentage return operating margin). The product of these two drivers is the ROAM.
In the latest 2012 financial year, for example, Fambrands’ turnover was R2,15bn and its assets at year-end amounted to R1,22bn. The asset turn was 1,76. The operating profit was R413m and, on turnover of R2,15bn, the operating margin was, therefore, 19,2%. Multiplying asset turn to margin, the ROAM was 34%. The ROAM in 2011 was 31%.
Consequently Fambrands has managed its assets better year-on-year and, the report tells us, one of the reasons was what it calls a ‘stellar’ performance in its logistics division in which the operating margin was a record of 3,5% (3,1% in 2011). This is small beer relative to the overall supply chain division as a whole which had a margin improvement to 21% from 17% the previous year, but logistics forms a big lump of revenue (R1,52bn) and is a costly exercise.
Eating out is not a necessity for most people and Fambrands has to get customers in to supply franchisees and its own outlets, the latter of which have been making losses. The company has also not been doing well in Wimpey in Britain. Here and elsewhere the market will be tough for a while yet, but Fambrands’ ROAM record underlines management strength.
Our holding of Fambrands has, based on Friday’s closing price, had an annual compound internal rate of return of 25% over the investment. The company has reduced the dividend cover, and the increased 120c final dividend (2011: 85c) will after withholding tax, be 102c. Total dividends, net, for 2012 were, therefore, 182c, a yield of 3,43% at the current share price of around R52 and 4,1% on our own investment. We’re not complaining.
(Click on the chart to see it more clearly)
Chart Comment: Charts of Fambrands warn that the price could come lower in the short term, which is good news for longer-term investors aiming to or top-up current holdings. Based on technicals, my faith in the share is illustrated by this simple two-and-a-bit year weekly chart. Using moving averages, red for short-term, green for medium-term and blue for long-term you can see the 237% price increase it has experienced since the start of 2009.
It was in May 2009 that Fambrands confirmed its bull trend as the share recovered from the 2008 crash. A bull trend is identified when the stacking order of moving averages is short-term above medium term above long-term. On this chart the stacking order remained intact until the start of 2011, when the short-term moving average (red) dipped through the medium term (green) and actually nudged at the long term (blue) moving averages, warning that a bear trend may be in the making. In March the price dropped to R35. However, with a burst of volume as buyers snapped up shares at bargain prices, the recovery back into a bull trend was swift.
Fambrands’ price then rose steadily until March this year before it became highly volatile, with keen buyers well outnumbering sellers and willing to bid ever higher for the stock. This can be seen by the extended length of the bar plottings and the shorter length of the upright volume plottings at the foot of the chart. An ever-increasing price hike is what’s called a ‘blow-off’ (well overbought) phase similar to the one seen at the end of 2010 before that price fall. We are now experiencing a similar price fall during which short-term holders will likely cash in, so allowing serious investors to gather stock.
I would advise chart watchers to place a moving average convergence/divergence (MACD) plotting over their Fambrand chart and wait for the plotting to penetrate upwards through the signal line. Also watch volumes as in Fambrands’ case they accurately reflect accumulation and distribution.