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Growth outlook remains sweet

Cake Box, which announced strong interim results today, benefits from a unique value for money fresh Devon cream egg-free cake product offering, unusually visible growth and high returns on capital associated with its franchise model. The company should continue to add value as a brand manager, food manufacturer, and franchise retailer, with excellent execution.

Cake Box Holdings Plc released interim results today. Total sales were 6.0% higher with an 8.0% increase in gross profit. However, costs associated with important raised investment in the administrative team were a drag on profitability. More positively, net cash increased by £0.8m, which should reduce H2 finance costs, and new store openings maintained a good momentum to be on-track for the full year.

Cake Box’s fresh Devon cream egg-free cakes clearly boast strong customer appeal. Its cakes represent affordable indulgences that are well suited to its franchisees’ retail locations and customer bases. As special occasion and “treat” purchases, its products seem unlikely to fall foul of any health issues prevalent in UK consumer goods right now. Moreover, egg-free has appeal to a wide range of religious and dietary groups. Today, approximately 1 person in 20 in the UK has some form of egg allergy.

Cake Box’s organic sales growth should remain brisk and visible. The company looks to open new franchise stores at a rate of around 24 per year. The ambition is to take its current franchised estate of 122 up to 250 in the next few years. Overall, the market for cakes and indulgences continues to grow. In this report, we also identify key UK regions which are ripe for footprint expansion.

Cake Box’s franchise model massively uplifts shareholder value creation, through superior returns on capital employed and free cash flow generation. In contrast to “owned and managed” store operators, there is no cash drain that arises as a result of new openings. Return on capital employed and return on net equity in FY2019 were of the order of 40% and 48% respectively.

Share price weakness since the company’s 14th October 2019 trading statement leaves the company’s stock attractively valued, in our view. Based on valuation relative to an eclectic peer group, we argue a 170p share price makes sense, a potential uplift of 21%. This implies 3.2x EV/sales, 12x EV/EBITDA and a 17x P/E – i.e. arguably undemanding valuation multiples given Cake Box’s capital light/brisk growth status.