Spur: Where Taste Meets Investment Potential

There appears to be more than meets the eye, or in this case, the tummy. Lets nibble away.

Spur, the People With A Taste For Life. Most of us have come to know Spur as our go-to family restaurant, serving the best steaks, ribs, and wings that the industry has to offer. However, what most people may not be aware of is that Spur is actually a publicly listed company on the JSE.

We know that Spur evokes memories associated with birthday parties, waffles, and cream soda ice-cream floats, but how does it hold up as a potential financial investment? There appears to be more than meets the eye, or in this case, the tummy. Lets nibble away.

Spur 101

 Spur Corporation has come a long way since its humble beginnings in 1967 with the opening of the first Spur Steak Ranch in Cape Town. In 1990, the company expanded its portfolio by introducing Panarottis Pizza Pasta, and by 1999, it was listed on the JSE as "Spur Corporation." Today, the corporation boasts 8 household restaurant brands with franchises operating in 632 locations worldwide. These franchises include:

• Family restaurants: Spur Steak Ranches, Panarottis Pizza Pasta, and John Dorys Fish Grill Sushi
• High end dining: The Hussar Grill, Nikos Coalgrill Greek, and Casa Bella
• Fast casual chain: RocoMamas

The Groups outlets/restaurants are spread across the globe, with 632 outlets in various locations such as Sub-Saharan Africa, India, Saudi Arabia, Mauritius, Australia, and New Zealand. Despite its global presence, 98% of the corporation's revenue is still generated by its 547 South African businesses, while the remaining 2% comes from the 84 restaurants based abroad.
 

Key Financials

• Ticker: JSE: SUR
• Share Price: 2300c.
• Market cap: R2.09B
• Div Yield: 6.96%
• P/E: 10.92
• 1-year share price: -1.18%
• 5-year share price: -16.94% (-3.4% annualized)

Revenue

The groups most recent revenue figures can be split into revenue per franchise and revenue per funnel.

1. Revenue per franchise:

Spur Steak Ranches generate the majority of the corporation's revenue at 67.73%. Following Spur is RocoMamas, with 11.26% of the revenue, and Panarottis Pizza Pasta at 9.97%. John Dory's Fish Grill Sushi accounts for 5.9% of revenue, while the corporation's speciality brands, including The Hussar Grill, Casa Bella, and Nikos Coalgrill Greek, generate 5.14% of the corporation's revenue. 

2. Revenue per funnel:

Manufacturing & distribution (71.5%):  Sale of all product inputs (meats, ice-cream, cold drinks) etc. to franchisees. Included in this 71.5% are the sales of all the brand-specific sauces (like the famous Spur sauce) to franchisees, retail restaurants and other retail establishments.

Franchise Restaurants (14%): Franchise- and license fees consist of 5% monthly turnover payable by each franchise, both domestically and internationally.

Marketing (8.3%): Included in the Franchise structure is a marketing fee (4% of turnover for Family restaurants and 2% of turnover for High end dining and fast casual chain) which is paid to the Group for marketing contributions and the use and benefit of the brand.

Latest financial YE results (June 22) 

• Revenue: +32.5% to R2.39B
• Profit before tax: +41.9% to R209.7m
• Headline earnings: +31% to 144.22c
• Dividend per share: 127c (no dividends declared in 2021)
• ROE (Return on equity): 18.2%
• Operating profit margin: 9.5%
• Current ratio: 2.07

Interim, 6 months results (Dec 22)

• Revenue: +35% to R1.53B
• Profit before tax: +103% to R168.4m
• Headline earnings: +198.5% to 137.14c
• ROE (Return on equity): 16.97%
• Operating profit margin: 10.98%
• Current ratio: 1.93

Strong profitability metrics have been displayed for the year end of 2022. Increase in revenue, profit after tax and ROE. The Group has strong liquidity levels with a lot of cash on hand and in position to take care of all short-term obligations.

Bullish outlook

E-commerce: The Group is favourably positioned to further take advantage of the ecommerce and delivery space. It is also exploring a new drive thru strategy, which thus far have been successful.

Diversified: The Spur chain covers everything from steak to sushi, from high end dining to take away and even birthday parties (830 000 birthdays celebrated in FY22). 

Brand & customer loyalty: Many of the Spur brands are household names. These brands are synonymous with family, quality food at good prices, and true South African flavours.

International expansion: The Group is focused on expanding internationally in markets where its brands will resonate with local consumers. A successful expansion campaign will lead to broader markets, more diversification and international valuta.

Bearish outlook

Fluctuating food prices: Food prices increased rapidly over the past year, which means higher input costs for Spur. 

Loadshedding: South African market conditions remain challenging with higher inflation and a dramatic increase in the level of load shedding hours, which directly impacted the supply chain. 

Management difficulties: The Spur Corporation must oversee a network of independent business owners, each with their own set of needs and challenges. This can be difficult and time-consuming, particularly for large franchise systems.

Brand reputation: Franchisees must be given some control over their brand and business model by franchisors. A single franchisee's bad behaviour or poor performance can reflect poorly on the entire franchise system and damage the brand's reputation.

Conclusion

Spur is trading at a 10.92 P/E and a R2.09B market cap, compared to Famous brands (Wimpy, Mugg & Bean, Steers, Debonairs, and Fishaways) trading at a 13.73 P/E and R6.6B market cap. We believe that Spur offers a more compelling investment case at this point in time. If food input prices and loadshedding are kept at bay and management continues to deliver like they have the last 12 months, shareholders should be rewarded with solid capital gains and dividends to boot.