MyHome Take 2 – A Second Chance with Franchise Brands?

Just like getting back with an ex-partner, there are number of risks involved in investing in companies which have previously gone bust and come back to the market in a different, but recognisable, guise.

Take Game Group for example. The computer games retailer was a stock market darling as recently as 2008, as it benefited from bumper sales of next generation consoles. However, the shares collapsed from 300p to just 2.4p in little under four years as the firm suffered from a cyclical industry downturn, heavy losses and unsustainable levels of debt. After being put into administration the company returned to the market in June 2014 as Game Digital (LON:GMD). But old issues have come back to haunt the business, with difficult trading conditions causing two profit warnings and leading to the collapse of the shares, from an IPO price of 200p to the current 72.5p.

Investors also have to watch out for those nasty private equity firms taking most of the benefits. Back in 2008 Sun European Partners was able to get its hands on the business of ScS Upholstery for an undisclosed (but believed to be token) sum after the firm’s own administration. Re-floating the business as SCS Group (LON:SCS) in January 2015 Sun cashed in for £35 million as well as retaining a 42% stake.

Another company which has recently come back from the dead is Franchise Brands (LON:FRAN), a business which bought up the assets of former AIM listed MyHome International after it went under in 2008. To give a potted history, MyHome was a residential cleaning franchise business which was originally spun out of Unilever and then listed on AIM in 2006, moving up from the old Ofex market. Following a period of expansion and a number of acquisitions it managed to grow annual revenues to over £5 million in 2007 and pre-tax profits to £1.46 million, with the share price more than doubling following the AIM IPO.

However, the firm went from boom to bust very quickly. In 2008 MyHome experienced the perfect storm of a deteriorating economic outlook, missed franchisee growth expectations, poor cashflow and the realisation that it had overpaid for acquisitions. The firm was soon in breach of some of its banking covenants and put into administration after bankers Lloyds TSB demanded the immediate repayment of all monies owed.

A clean slate

Franchise Brands was set up in September 2008 by Stephen Hemsley, the former CEO and current Non-Executive Chairman of franchise giant Domino’s Pizza UK & Ireland (LON:DOM), along with serial investor Nigel Wray, in order to buy MyHome’s operating subsidiaries. Hemsley and Wray currently have the respective positions of Executive Chairman and Non-Executive Chairman and hold a combined 57% stake in Franchise Brands.

An internal clean-up operation since 2008 has seen the closure and sale of several smaller brands, with the company now operating three franchise businesses.

ChipsAway is a mobile car bodywork repairs business which was bought by the previous incarnation of MyHome in 2007 (and highly criticised for the toppy £16 million buyout price). It currently has 225 franchisees in the UK which make annualised revenues of £15 million between them, along with a presence in ten other countries via master franchise or licence agreements. Franchisees pay the company an initial fee of £29,995, along with other periodic fees including one based on 10% of turnover.

Secondly, Ovenclean is a mobile domestic oven cleaning service which currently has almost 100 franchisees across the UK making a combined £5 million in sales per annum. There is also a small presence in Canada via a master franchise agreement for Greater Toronto and Ottawa. Franchisees pay an initial fee of £14,995 and then ongoing monthly fees.

Finally, MyHome is the company’s premium residential house cleaning operation. But it no longer operates at the scale it once did. Most of the company’s c.70 franchisees (at the time of administration) subsequently terminated their agreements and the business is now at a stage where test marketing is being carried out prior to a possible full re-launch. Franchise Brands is being cautious, however, due to the potential damage done to the MyHome brand name by previous management.

The three businesses are supported by a centralised services function, which helps franchisees with marketing, generating customer leads, training and other support services. The strategy now is focussed on growing the franchisee base into new territories and helping existing franchisees to grow their business. The potential acquisitions of already established franchisee brands are also being looked at.

Under new management the business is now stable and nicely profitable. While revenues slipped by 7% to £4.38 million over the two financial years to December 2015, pre-tax profits rose by 52% to £1.12 million as scale benefits were realised. Cash flow is also good, with the net inflow from operations being £1.04 million in 2015. The balance sheet showed net debt of c.£1.27 million as at 31^st December 2015 but the position was strengthened following a fundraising at IPO which raised a net £2.86 million for the company. Trading in 2016 is said to be in line with expectations, with a slight increase in ChipsAway and Ovenclean licence sales compared to the same period in 2015.

Will investors clean up on the shares?

Shares in Franchise Brands have had a relatively good start to life on the market, rising from the IPO price of 33p to a high of 43.5p, before settling back to the current 41.5p. At that price the business is capitalised at £19.55 million.

House broker Allenby is looking for steady growth from Franchise Brands over the next two years, with pre-tax profits expected at £1.14 million for 2016, rising to £1.25 million in 2017. On earnings forecasts of 1.94p and 2.15p per share the shares trade on a current year multiple of 21.4 times, falling to 19.3 times in 2017. For investors looking for income, the firm’s dividend policy is a little vague at present, with it expecting to make a regular payment in the “medium term”.

So the valuation here is not cheap but could be a price worth paying given the current profitability of the business and the highly scalable operations.

But more than anything, Franchise Brands looks to be a play on its exceptionally strong management team. During his time with Domino’s Pizza UK, one of the most successful franchise businesses in the country, Stephen Hemsley grew the business from 100 to 900 stores. Investors did very well indeed, with the firm’s market cap growing from £25 million to the current £1.83 billion. Nigel Wray hasn’t done so badly as an investor either, and I admire the time and money that he and Hemsley have put into this business. I also note that, unlike with many private equity floats, there were no selling shareholders cashing out at the Franchise Brands IPO.

Overall, with the mistakes of the past learned, a new and highly experienced team on board, and the potential for long-term expansion, I believe Franchise Brands looks worthy of a speculative buy.