Stockwatch: the numbers are stacking up nicely for this small-cap

by Edmond Jackson from interactive investor |

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If cream cakes serve as comfort food for a Covid winter, our companies analyst believes this stock could be on to a winner. 

Not to overly emphasise an AIM-listed small cap company, but I should update progress at Cake Box Holdings (LSE:CBOX) having re-iterated a ‘buy’ stance on 17 June at 161p which capitalised the business at £64 million. 

My gut sense – forgive the pun – was comfort food being likely to benefit as Covid strictures continue. Personally, I have just been through an apple crumble phase: giant ones made with oatmeal, muscovado sugar, blackberries or dates. Each is typically gone in 24 hours and at least one serving must have lashings of custard with a sprinkling of ground ginger for zest.  

I am no lover of cream cakes but suspect this UK franchiser of shops – supplying ingredients for the franchisees to put together on-site – has a concept now genuinely rolling out. Moreover, there will be keen demand from new franchisees, some displaced from the hospitality industry, although training is provided for any background. 

Two rather promising updates just lately

I was not going to jump in response to a trading update quite soon, namely the one on 1 September which cited 14% like-for-like sales growth over three months to end-August after franchised stores re-opened. Online sales were also growing at around 74% via the likes of Uber Eats, Just Eat (LSE:JET) and Deliveroo. Such trading plus sound cash generation meant furlough monies were being repaid and a cancelled final dividend of 3.2p was being restored by way of a special payout to holders as of 9 October. 

Cake Box now cites £8.6 million revenue for the five-month period to end-September, with 12% like-for-like sales growth. Admittedly, that is less than before, and the overall six-month revenue has eased 2% to £8.6 million, reflecting six weeks of closures. Within this, online sales growth has risen to 81% over five months. 

I suspect the short-term outlook has less to do with financial analysis than whether cream cakes will cut it as a comfort food this Covid winter? Medium to longer-term however - and despite enough warnings about obesity - well-marketed celebration-type cakes appear to have a firm role. See also the ongoing national obsession with TV’s Bake Off. Cake may be naughty but is irresistibly nice. 

So, marketing wise, this business could well be operating in more than a niche.

Attractive numbers in a franchising set-up 

The five-year table shows strong conversion of operating profit to cash, with cash flow per share usually ahead of earnings, although capital expenditure trims it. Returns on capital employed and on equity have also been very high if moderating lately from over 50% to a 30% range, which is still excellent.  

A key reason I have added a “speculative” tag however is wariness about how a roll-out play like this tends to be good for so long as expansion continues apace.

Active small-cap traders back momentum and the price/earnings (PE) ratio is prone to rise ahead of underlying earnings growth. Presently at 174p, the PE multiple is 19x the consensus estimate for £3.4 million of net profit in the year to 31 March 2021 translating into earnings per share (EPS) of 8.6p, and 14x the expectation for 11.6p in 2022. Such a growth rate would however be accelerating into a 30% range. 

Cake Box Holdings - financial summary          
year end 31 Mar 2016 2017 2018 2019 2020
Turnover (£ million) 5.6 8.7 12.8 16.9 18.7
Operating profit (£m) 1.2 2 3.4 4.4 3.8
Operating margin (%) 21.7 22.9 26.3 26.3 20.3
Net profit (£m) 1.1 1.6 2.8 3.0 3.1
Reported earnings/share (p) 2.7 4.1 6.9 7.5 7.7
Normalised earnings/share (p) 2.7 4.1 6.9 8.7 7.7
PE ratio (x)         22.6
Operating cashflow/share (p) 5.4 1.5 8.0 7.9 8.3
Capital expenditure/share (p) 1.4 1.0 1.3 5.3 3.1
Free cashflow/share (p) 4.0 0.5 6.7 2.5 5.2
Dividend per share (p)       3.6 1.6
Covered by earnings (x)       2.1 4.8
Return on capital employed (%) 58.7 46.2 54.0 43.8 33.2
Return on equity (%) 526 116 78.4 53.2 38.8
Cash (£m) 0.2 0.5 2.5 3.1 3.7
Net debt (£m) 1.5 2 -0.9 -0.9 -2.1
Net assets (£m) 0.4 2.4 4.7 6.6 9.5
Net assets per share (p) 1.0 6.0 11.7 16.6 23.7
Source: historic Company REFS   and company accounts          

Defined scope to expand the estate by a third

In support of this scenario, the latest update cites “a very strong pipeline of new franchisees, driving confidence that the rollout programme will return to levels seen prior to Covid-19. Currently, the group has received and is holding deposits for 47 sites across the country.”

This compares with a total 139 stores at end-September, having added six during the first half financial year and three new ones expected to open imminently.

With many people being displaced from existing jobs, especially in hospitality, Cake Box should have its pick of talent. 

Logistically, they appear to have their act together. When the business initially floated at 108p in June 2018 and shot straight to 160p (reaching 190p that autumn), I had a concern that the perishable nature of fresh cream mixed with newbie franchisee talent - as the group expanded – might result in an “upset stomachs” scare story? So far, so good.

What UK scope for personalised celebration cake? 

Originally, this business was founded on a “free-from” concept: of cake without egg, for British Indian Hindus. This appears still to be the case, hence I am unsurprised to have read some reviews citing the sponge as dry, and why these cakes tend to involve a lot of cream.

But, overall, the key question seems, what is the long-term scope for personalised “eight-inch celebration cakes costing about £25” as this company’s core product? Plenty of families have less time or inclination nowadays to create them. 

An online shopping culture now taking hold may also help overall sales, especially if the marketing side can hone social media skills. Cake Box appears to have its act together for online deliveries. 

Online reviews vary – three stars overall – from “bitter and dry” to “I don’t understand the bad reviews” to “best cake ever, absolutely lush!” Most likely it is all down to taste. My judgment is largely emotional too, just as I am besotted with my crumbles.   

CEO sells 23% stock, but finance boss is a buyer

On 9 September, the co-founder and chief executive officer sold £6,375,000 worth of shares at 170p to institutions. We are not told his ongoing holding, but last September’s annual report shows he held 16.5 million shares as of last March, and I calculate he has sold nearly 23% of this. 

Simultaneously, the co-founder and finance boss bought £383,000 worth of Cake Box stock, also at 170p, which is material, and by someone who knows the books. With 3.5 million shares last March, he has upped his stake by 6%.  

The CEO could be engaged in estate planning, an opportunity has come along to diversify his interests, etc. He must know the only time to sell a material stake – especially in an AIM company – is when the story sounds good enough for institutions to buy, or the business gets taken over.    

Last November the CFO also bought £225,000 shares at 150p and it is good to see a finance boss continue to build his stake to near 19% now. However, at flotation the founders did cash in £16.5 million worth of equity, reducing their stake from 88.4% to 50.1% - a cute compromise of getting rich while retaining control.

Most likely they are amply “in for free” yet genuinely believe in and are committed to the business. A red light is when founders are cashing in and handing over control. 

Despite near-term sales growth easing slightly, plus the sticky question of cream cake demand, the numbers look overall to be stacking up nicely here. So I maintain: Buy.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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