After releasing results for the year ended February 2022, Famous Brands rallied by as much as 11% before settling down to a 4.9% gain by lunchtime on Tuesday.

As a quick reminder, Famous Brands is a vertically integrated company that primarily services a vast footprint of franchised fast-food outlets and restaurants. In some cases, there are corporate-owned restaurants.

The network has 2,824 outlets and 17 restaurant brands. Most of these are in South Africa (2,470) with the remainder in the rest of Africa and the Middle East (287) as well as the United Kingdom (67).

You also need to know that the group reports based on two segments, largely depending on whether you feel like a quick burger or a sit-down meal with a more interesting choice of drink. The Leading Brands segment is further split into Quick Services and Casual Dining, with Signature Brands as the fancier segment.

It should go without saying that the pandemic was truly horrible for Famous Brands. Woolworths was barely even allowed to sell cooked chickens at times, so you can imagine how things looked for Steers and Debonairs. This result is compared to the year ended February 2021, so the base year is one that is best forgotten.

Revenue is up 38% vs. that period and headline earnings per share (HEPS) has jumped by 568%. Importantly, cash generated from operations increased by 67% to R871 million. Net debt to EBITDA has fallen sharply from 3.04x to 1.32x, a far more comfortable level.

Return on Capital Employed (ROCE) is measured as operating profit divided by the sum of equity, interest-bearing debt and net lease liabilities. In simpler terms, this is a way of measuring the return achieved on investment, regardless of whether the capital used in that investment takes the form of equity or debt. ROCE was 29% in this period, which is a great reminder of why investors like this business model.

At segmental level, Leading Brands revenue was up 58% to R773 million and Signature Brands was up 91% to R145 million. You can clearly see the impact of Covid in the base year on the restaurants that rely on alcohol sales to make money. Another factor is that during Covid, people were prepared to get take-aways but weren’t so keen on sitting in a restaurant. Those were truly horrible times in our lives.

Turnover in the Signature Brands segment is still below Covid levels, as this reporting period was impacted by curfews, capacity reductions and alcohol restrictions.

Interestingly, Famous Brands notes that although competition in the sector is fierce, new brands are not emerging. This makes sense given the difficult backdrop. As Roco Mamas (eventually acquired by Spur) showed us though, a new kid can arrive on the block when the environment is more attractive.

Another important observation made by the company is that consumers are eating out less often because of financial constraints. Premium restaurants don’t really notice this issue, as rich people will always have money for great food and wine. In the rest of the market, restaurants must offer great value to compete successfully.

Looking abroad, most markets in rest of Africa and Middle East returned to 2020 trading levels by the end of this financial period. In the UK, Wimpy’s operating profit improved by 18% and margins were steady at 13%. Delivery sales have declined as customers have returned to restaurants.

Further back in the value chain (where Famous Brands actually makes its money), manufacturing operating profit was up 65%. In the logistics side of the business, operating margin increased to 1.5% from a loss-making -0.4% in the prior period.

Although consumers are clearly venturing out again, the retail business (a Steers sauce in a supermarket) registered a 47% increase in sales to R222 million. This is a substantial part of the business and Famous Brands shareholders enjoy all the wholesale profits here, as franchisees don’t get a slice of this action when head office sells sauces and similar products to retail outlets. This is an important growth area for Famous Brands, with a plan to launch at least 12 new products in the year ahead.

A dividend of 200 cents per share has been declared, representing a yield of around 3.3%.

This was a strong recovery year for Famous Brands against an easy base. After several years of making mistakes and pursuing international high-risk opportunities, the management is focused on the core business. This is good news for investors.