Spur: A taste for Investors

In late-July Spur Corp acquired a 60% stake in Gauteng-based café bistro chain Doppio Zero. Spur issued a voluntary on the deal but gave little information. I had a chat with the CEO and CFO and thus add some colour to that announcement.

I’ve had a long: Spur Corporation short: Famous Brands recommendation for nearly two years. It’s been the correct call.

Much of this has been premised on my stance on Spur Corporation, its sit-down casual diving offering which has benefitted especially during loadshedding and its nimbleness. Any deal it undertakes usually can move the needle, unlike Famous Brands where bolt-on’s hardly move the juggernaut.

Spur Corporation issued a sparkling trading update for its year ended June. There has naturally been a slowdown in the bumper post Covid like-for-like sales growth but sales for the past six months have been robust with the core Spur Steak Restaurants showings ales growth of 24.9% and the upmarket speciality brands +42.2% year-on-year. The group reported a like-for-like rise in restaurant sales growth of 23%.

The trading statement suggests that the value, family offering of Spur continues to attract patrons as does the affluent upmarket speciality chains like The Hussar Grill.

The constrained middle market who would assumedly frequent RocoMamas and John Dory’s saw a much smaller growth year-on-year of 9.6% and 8.7% respectively.

With Spur guiding HEPS of between 256.7 cents per share and 263.91 cents per share on a mid-HEPS of 260.81 cents that places Spur Corporation on a forward PE ratio of 9.2x based on the prevailing 2401 cent share price.

With the company having no debt, a solid dividend payer and the recent acquisition of Doppio Zero to come into the fold this rating looks attractive and again I reiterate if I wanted to be in fast foods Spur would be my first choice of an investment.

Below is a note that maintains my long-standing stance on Spur:

Share code: SUR

Share price: 2360c

Market cap: R2,147m

52-wk high/low: 2599c / 1850

Prospects

Spur Corporation is not known for being acquisitive. Its last deal was to buy a 51% stake in Niklos Coalgrill in 2018 and that was a small business.

They have had some misses as they digressed away from their core competency of consumer casual diving. The 2012 purchase of low-end consumer fish, chicken & chips business Captain Dorego’s was a disaster and that was exited in 2018.

I have been aware for nearly a decade that Spur was looking to buy into the coffee café segment with several deals looked at and passed.

Last week, Spur agreed to buy 60% of Gauteng based chain Doppio Zero which adds 37 outlets to its speciality brands division. I add some colour to last week’s Spur voluntary announcement. 

Late last week Spur Corporation issued a voluntary JSE SENS regards its acquisition of a 60% stake in Gauteng-based coffee-café chain Doppio Zero.

The deal sees Spur buy the speciality eatery that comprises brands Doppia Zero, Piza e Vivo and Indian restaurant Modern Taylors alongside the bakery and central supply business. The revenue for the group was stated as R600 million for the chain of 37 outlets with the majority in Gauteng with 3 outside the province.

On the back of the deal, I spoke to Spur CEO Val Nichas and CFO Christina Teixeira to gain some colour on the transaction.

I have been aware for some years that Spur Corporation has been seeking an acquisition in the coffee casual diving segment and has looked at Vida Café, Bootleggers, Motherland and Wiesenhof Coffee among others but none met the strict Spur criteria.

As CEO Nichas commented to me ‘we didn’t want to buy a grab a coffee, avo and toast type business but wanted a brand that was aligned with Spur’s strengths in casual dining’. Doppio Zero fits that bill with a higher customer spent from a consistent daytime and evening trade.

I know the Doppio brand from my days in Johannesburg though the chain will be unfamiliar to non-Vaalies. I’d say the chain is more up-market that Mugg & Bean but not as pricey or high-end as Tasha’s; it’s the middle ground that fits well into the Spur Brand portfolio. 

Of the 37 outlets, 25 are franchised and 12 are corporate owned. This is a similar strategy that Spur has with Hussar Grill where some of its best performing restaurants are corporate owned. Nichas commented that Spur will review the corporate-owned stores and keep the higher value stores in-house.  

Spur liked the Doppio Zero concept. Many coffee brands were viewed as more of a light breakfast and lunch format where consumers rush in grab a coffee to go or sit and have a light meal. 

This was not what Spur wanted. They desired a brand that saw customer linger, had more of an entire day and early-evening offering where menus were café bistro in style and the addition of extra menu option and alcohol added to the experience and margin. Doppio brings that alongside higher spend per customer. 

With a proliferation of coffee shops that have opened in South Africa over the past years both regional and national chains, the segment is competitive and somewhat over-traded. The QSR segment, given the state of the consumer, is also tight. However, the mid-t0-higher end casual dining segment has been more resilient.

This is why Spur took its time to find the right acquisition and passed over so many that it scouted or was offered. 

Doppio Zero was founded in Greenside, Johannesburg in 2002 by Paul Christie and Miki Milovanovic and today has sales of R600 million with a presence in café-style eating with a strong daytime and early-evening trade.

Of the 37 outlets, most are in the Johannesburg and surrounds with one outlet each in Port Elizabeth, Umhlanga and Nelspruit. I enclose a pricing menu from the Gauteng outlets.

https://doppio.co.za/wp-content/uploads/2020/06/DZ_WinterMenu_Main_2023_Online-.pdf

Spur did not disclose its profitability, but I was guided “Doppio will be another Hussar Grill to Spur with a similar profit margin” …. which have a 10% - 12% profit extraction. This is encouraging as Hussar has been a resilient chain within Spur despite the weak consumer environment. Perhaps, Doppio’s more affluent client base will be as resilient.

I see potential in the Doppio acquisition to Spur. The big difference between Spur and rival Famous Brands is that Spur principally has a casual dining competence whereas Famous Brands is more widely a fast-food counter, fast service, QSR juggernaut offering. 

Thus, Doppio fits well into Spur and given its relative size and the 37 outlets it brings can move the Spur needle much as RocoMamas did. Doppio would not have touched sides at Famous Brands thus the deal, to me, has better significance to Spur. 

As a people orientated casual dining business, Spur aims to build a relationship with its customers and again the style of Doppio fits into that mould. 

We all recall what a deal disaster Spur’s acquisition of Captain Dorego’s was when the company decided to enter the lower-income consumer fast food segment in 2012 paying R34 million for the fish, chicken and chips business. It threw in the towel in 2018. Doppia takes them back into their core competency with the last deal in the space being Spur’s purchase in mid-2018 of a 51% stake in Greek franchise business Nikos Coalgrill.

The speciality brands portfolio within Spur comprising The Hussar Grill, Casa Bella and Nikos reported revenue of R359.8 million in Fy2022 with the fastest growth within Spur with like-on-like growth from the 36-outlet division of 52%, granted off a lower FY2021 post Covid base. 

With sales of R600 million, Doppio will turbo-charge the contribution of speciality brands with RocoMamas as a stand-alone brand having FY2022 revenue of R789 million as comparison. 

The Spur buy-in to Doppio allows the Gauteng-based chain to now become national and I understand that Spur would at least like to double the Doppio footprint – over time. 

With Spur having a well-established franchise base and landlord footprint, I’d imagine that Spur will have received many phone calls post the deal to gain a Doppio franchise or gain new locations for the chain. I understand there were calls hours after the announcement from interested parties. 

I believe a Doppio franchise costs circa R6 to R6.5 million though Spur will aim to trim that initial cost. This is materially lower than a Tasha’s franchise which I believe goes for circa R10 million.

The Doppio founders have agreed to stay within the business and on the board for five years and seem happy to own a smaller piece but of a potentially much larger cake given Spur’s ambitions for the brand.

On asking why the founders wanted to sell, Spur commented that the pair had been funding the business from their own balance sheet and to grow the business they felt they needed a partner. Thus. Christie and Milovanovic retain a 40% take which Spur has pre-empties over. The stake was sold for cash with no Spur shares in the offering.

Spur CEO Nichas was excited to undertake the deal and keep the founders in the business for five years (or) even longer. 

For the best part of two years, I’ve has a long: Spur Corporation and short: Famous Brands and it’s been the right call.

My premise is that “if I wanted to be in fast & casual food – and that was a big if – which stock did I want to be invested in”. My recommendation has been Spur Corporation and its underlying outperformance has borne my stance out. 

With results ahead for both counters and having listened into the recent Famous Brands AGM on July 20th (presentation link below).

https://thevault.exchange/?get_group_doc=275/1689863641-AGM-VoluntaryMarketUpdate20July2023.pdf

I maintain my stance that Spur remains my preferred sector play, though I’m still unconvinced, given the on-going weak consumer environment, (if) I even want to be in the sector.

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