Investors buying into Cake Box Holdings now could end up with cream on their faces, but certainly not egg, writes Mark Watson-Mitchell.
You would have thought that this company was operating in a highly competitive marketplace. Just think of the supermarkets, café chains and bakeries that tempt you with their arrays of fresh cream cakes.
It is part of a £2.5bn UK market for small cakes, large cakes, celebration cakes, occasion cakes, puddings, cake boxes and sweet baked goods. But the £725m UK market for celebration cakes is the primary focus of Cake Box Holdings (LON:CBOX).
The company, which specialises in egg-free, fresh cream cakes, apparently does not have any other peer operating across the UK producing comparable products. The cakes are completely egg-free, which has no effect on taste and texture and allows a much larger potential market to be serviced, including those customers who are unable to eat eggs for dietary or religious reasons.
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However, what really does make this company different from others that may be in the space, is because it operates on a franchise model basis – a bit like Domino’s. It does not own or operate any of its own stores.
The group has a very good demand for its franchise stores, it does not even need to advertise for new franchisees. It gets around 80 enquiries per month from potential franchisees, who are attracted either by the company’s own website, or from being existing customers or even existing franchise holders. I understand that nearly 20 of the current franchise holders operate more than one store.
The company, which was started in 2008, has grown from a single store in East London, to 19 by March 2013 and up to some 98 stores by the time of it going public in June last year. Since then it has grown still further, with 113 by the time the group announced its results for the year to end March 2019, at the end of June.
I understand that the group has a target of 250 stores within the next five years – and at the current rate of growth that could be easily achieved. It is now opening six new stores every three months.
From their patisserie displays those stores offer a large range for immediate purchase of its freshly hand-made egg-free cakes and slices in-store using fresh cream. Cakes are available to order in-store or online for collection. With hundreds of celebration cake designs to choose from, cakes can also be personalised on the spot with a free message.
Even personalised photos printed on sugar paper can be added to any cake. They offer a large selection of cake sizes ranging from eight to 120 servings per cake. Whilst individual hand-made cake slices start from only £2.50.
The average franchise store sells around £6,600 per week, with franchisees able to earn an average £94,000 per annum per store. Franchisees can see payback on their turnkey package within an average of 18 months. They do not suffer any marketing levy. They have a strong and predictable cash flow generation from a low risk franchise model.
The 2018/2019 results showed a 33% rise in revenue to £16.91m, with pre-tax profits up 19% at £3.81m. Earnings were up 14% at 7.90p, whilst the dividend was 50% improved at 2.4p per share.
For the current year, broker estimates suggest that £20.20m of sales could produce £5.00m of pre-tax profits, worth 10.10p in earnings and 4.60p in dividend per share. The end-March 2021 year could see a turnover of £23.60m, with profits of £5.80m, 12.10p of earnings and a dividend of 6.10p per share.
It is that type of sales and profit growth that investors go for and that is why they are prepared to pay a premium to get in early on such growth.
There are 40,000,000 shares in issue, of which Sukh Chamdal, the CEO and joint founder, owns 41.34%. His CFO, Pardip Dass, owns 8.80%, whilst Jaswir Singh, the COO, has 1.35% of the equity.
Professional holders include AXA Investment Managers (6.13%), Canaccord Wealth Management (5.69%), Ennismore Fund Management (5.40%), Otus Capital Management (4.56%), Amati Global (3.42%), and Lombard Odier (Europe) (3.03%).
Together the board and institutions control some 80% of the equity, so that is quite a tight market.
I love cream cakes (who doesn’t?) and I really love the growth potential of Cake Box. With its shares now at 180p, valuing the group at just £72m, I see at least a 33% uplift within the next year to 240p and above.