Previously, I highlighted some of the so-called ‘reopening trades’ that remain on the JSE (There are still ‘reopening trades’ out there), which included Spur Corporation (SUR). Spur has now released their full H1:23 results revealing quite how well they are doing and the share price has started responding positively.
How much more upside may be left? The answer may surprise you.
Spur Corp saw their H1:23 restaurant turnover rise +31.5% driving Group revenue +35% and doubling profit before tax. Headline earnings per shares followed suite with a 198% (comparable HEPS was +81% y/y) which management used to hike their dividend +67%. The Group’s balance sheet remains net cash with no gearing, Group cash flows remain strong and core operating expenses were tightly controlled and, as far as I can tell, remain below pre-COVID levels (i.e. exiting the pandemic leaner and fitter as a Group)!
While supply chains are still normalizing (though are far better than before, with the exception, perhaps of chicken), the Group was probably a net beneficiary of loadshedding. 95% of its stores run on generators (with running costs only 0.5% to 2.6%) with inverters, battery and solar setups there too. Thus, when consumers are loadshed around mealtimes, Spur (being Spur, RocoMamas, Panarottis, John Dory’s, The Hussar Grill, and a couple other brands) is a viable alternative. This is especially true if you have kids (Spur absolutely dominates in the family restaurant market!), but also if you are using UberEats or Mr D for deliveries.
On this latter point, it was great to see Spur management using virtual kitchen brands (“VK brands”) like Just Wingz, Pizza Pug and Bento’s to generate incremental sales. These incremental sales leverage the Group’s existing store footprint adding high-margin revenues to existing fixed costs that should cascade down the Group’s income statement. Also, I suppose, if one of these VK brands really take off, the Group can start to roll out specific restaurants for these brands.
This is all positive and, despite pressure on consumer disposable income, Spur is well-positioned going forward with many levers to pull to extract profitable growth.
But how does the share’s valuation look?
The Group’s share’s rolling 10-year average Price Earnings (PE) is 17.6x. Even compared against one standard deviation below this average, Spur share’s meagre 11.6x current Price Earnings is low. Exceptionally low.
But the world has changed, South Africa’s environment gotten tougher and interest rates have risen (which should benefit ungeared companies, by the way!). How does Spur Corp stack up against global peers and its local rival, Famous Brands?
Despite being much smaller, Spur (and, indeed, Famous Brands) compare quite well against major global QSR and restaurant chains that are listed. Both have pretax (important to use pretax, as other geographies have different tax rates) Return on Assets that higher than most QSR groups.
Interestingly, both are also much cheaper when compared against their EV/EBITDA (kind of like a PE ratio, but manages for different cost structures and neutralizes different levels of debt to make it more globally comparable).
Now, if we statistically find the “line-of-best-fit” (linear regression) tracking these stocks, the market tends to pay more for QSR stocks that are more profitable. I.e. Higher EV multiples on their EBITDA from higher Pretax ROA’s.
Famous Brands is not just less profitable than Spur (lower Pretax ROA), but its valuation is sitting comfortable on the line-of-best-fit. This implies that Famous Brands is appropriate valued against this peer set.
Opposing this, Spur Corp’s superior Pretax ROA, though, implies that it should be materially higher valued (follow the red line to where SUR share’s valuation would sit and the implies EV/EBITDA multiple). In fact, if you follow this logic through, Spur’s valuation (and, hence, its share price) should be a little over two-and-a-half times higher on an EV/EBITDA approaching 23x!
Thus, the evidence (greater than a standard deviation undervalued against history and out of kilter with global peers) that Spur Corp’s shares remain quite comfortably undervalued despite its constructive prospects. Thus, the answer to “how much more upside may be left in Spur shares” is “could be quite a lot”!
THIS ARTICLE ORIGINALLY APPEARED ON MONEYWEB.