Spur Corporation Update

I attended the Spur Corporation AGM & gained an update on current prospects

Its the last week before most go away on festive leave and Im working though my last official corporate meetings. In December there are always lots of unofficial chit chats & coffee updates as is the @Smalltalkdaily way

The Spur Corporation AGM was recently undertaken and I participated and spoke to CEO Val Nichas post the event. 

Despite the known challenges in the economy, loadshedding one of the worst for QSR businesses, Nichas was in an upbeat and pragmatic mood.

Spur from the worst of the Covid pandemic, the shut-down of eateries and the phasing in of the re-opening regulations made some ends meet from its deliveries and dark kitchens.

The last full results to the June year-end saw Spur report a 32.5% leap in revenue to R2,391m with a 41.9% rise in Profit before tax to R209.7m.

HEPS increased 30.9% to 143.68 cents per share for the FY2022. 

The company is debt free and sits on a fat cash cushion of R290.7m as of year-end. 

For the forthcoming H1 2022 period to December the H1 2021 results reported a 119.3% in HEPS from what was a prior very depressed Covid base. H1 2021 HEPS were 70.1 cents per share with an interim dividend of 49 cents per share. 

As I pen this note on my trusty iPad at the Mugg & Bean at the V&A Waterfront - oh the brand betrayal but they do a great toasted bacon & egg sandwich - the Spur Corp share price is trading at 2164 cents +1.98% with a year-to-date performance of -15.1%. 

Thats may not look great on paper relative to the returns in the JSE small and mid-cap sector indices, but Famous Brands as a comparative, is down -24.9% year to date, so Spur wins all the way in 2022. 

Could the same be the tone in early-2022 as the trading updates for the past six months start to appear on SENS?

The good thing about the December Spur Corp AGM is you get a snapshot basically into the first five and a half month trading of the interim period. Its an AGM I look forward to and always attend.

The corporate CEO Val Nichas is a little more guarded than the late CEO Pierre van Tonder who was a happy to retort some corporate titbits of divisional trading without ever fully crossing the line. But you got a good feeling. 

My sense from the AGM and call-back from CEO Nichas was that of quiet but pleasing expectation and she stated she was filled with optimismhardly a comment a company would make if trading was looking dire in a lacklustre, power-starved economy?

Some pointers from the AGM

The last five months trading in trends from the Covid period has been good. In the high food traffic density areas where tourists and consumers congregate, especially in the Western Cape, these areas alongside the specialists eateries are performing very well.

There was some concern about trading patterns in Natal as tourism destination changes occur due to the known problems in that Province. That was a threat but Gauteng should end the period reasonably well. 

The family brand - the core Spur Steak Ranches - are somewhat challenged with consumers strapped for cash and some downgrading in menu value occurring.

The ever-present spectre of loadshedding and consumer spending was never far from the conversation. 

The company mentioned that 95% of their outlets and locations had diesel generators and that high quotient has seen Spur be a net beneficiary of higher trading volumes during recent loadshedding and the extended loadshedding periods as families looked for a value meal offering.

Despite the operating costs of diesel generators and the trimming of consumers menu spend, a greater throughput of customers was providing offset. 

Consumer spending seemed to be only at the inflationary level with a rise in demand for affordable meals without the usual extras and trimmings.

Spur has implemented menu price increases of between 3.5% and 5.5% in November and they were in the market. However, it was commented food price inflation internally was running at 12.3% and Spur has had to absorb some margin.

The AGM mentioned the current issues with supply chains and the cold supply chain.

It was mentioned the chain was experiencing a tightness in chicken supply as national production has been interrupted by loadshedding. 

Astral Foods mentioned this was a key indicator in its recent FY2022 results and was curtailing its expansion and removing some six million birds from the system to try and play catch up with the havoc that excessive loadshedding was having on its abattoir.

Spurs comment hit home with me given my detailed coverage of the poultry sector.

A further threat that had not been front of my mid was that of supply disruption in the cold chain due to extended loadshedding.

In the manufacturing side of food preparation, the known impacts of power disruption to manufacture, the wastage, cleaning cost and re-manufacture are a known and have been commented on by several food producers. 

Id not given much thought what the impact of extended loadshedding for up to eight hours plus a day was having on the cold supply chain. 

With blast freezers and industrial refrigeration units also suffering from the same daily grind it was commented by a participant that tightness in the cold supply chain and thus the availability of products to cook and serve was now becoming an issue.

It was suggested the next couple of week ahead of Christmas would be critical in this regard to having enough stock in the system.

Thinking logically, you simply cannot over order perishable goods and store in a freezer (if) extended loadshedding could impact the food safety standard integrity of the product think chicken as a classic example yet alone other perishable goods like ice cream and fresh produce. 

This cannot only be true for Spur but all national QSR operators. Something to consider into 2023 and the results narrative. 

A quick comment on Spurs offshore interest stated lots of new stores had been opened and they were trading to budget and expectation. 

Overall

I was quietly encouraged by the optics and narrative gained at the Spur Corporation AGM.

My reading that the recovery remains underway and given the high base set for interims in H1 2021 (+119.3%) the next set of interims due in mid-February will show solid growth off that base despite the known challenges to the consumer and economy.

I still cant say hand on heart Id want to be specifically in fast food counters Spur and Famous Brands in 2023 for reasons well known.

The tourism sector is fleeting, South Africans despite any gloom will always found money for a good time over the Festive period, so these results from the sector may be the benefit of those trends.

But heading in to 2023 with continuing pressure on consumers discretionary spending from higher interest rates, food price inflation and the perpetual dark spectre of loadshedding (and talk of diesel shortages given all of the generators installed in South Africa) . Spur would still be my pick of the fast-food sector as its debt free, has net cash, is a little nimbler that Famous Brands and seems to have a good results period ahead of it.

But I dont want to be invested in fast food currently due to the above mentioned but as an analyst I have to make a callso Id pitch Spur Corp but (again) I still dislike the sector presently. 

If the queues I see here in Cape Town with patrons lining down the isles to get into the Spur and comments from the company that deliveries remain robust, Spurs interim trading update (may) just surprise the market upon release and lead to some good headlines.

Ive had an avoid rating on fast food stretching far back into early-2020 when I published the months STATS SA data on fast food trends they were dire. Avoiding the sector was an easy call.

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