Patisserie Holdings (LON:CAKE)
Share price: 340p (+8%)
No. of shares: 100 million
Market cap: £340 million
This is a chain of cafés offering handmade cakes and ice creams, rolling out at a solid pace.
Results are solid, and kudos to the company for quickly showing the statutory pre-tax profit. Not needing or wanting to make any adjustments, even if adjustments are often justified, is a great sign:
Note there is a small dividend attached to these shares. The next final dividend is 2.4p, so the total dividend for the year is 3.6p.
A profitable, self-funding roll-out is a fantastic place to be when it goes right. On an after-tax basis, Patisserie Holdings (LON:CAKE) generated £20.4 million in cash from operations, of which it only needed to plough £8.7 million into capex. Given the growth profile, I guess that most of this is growth-oriented capex.
Last year, it also had a very positive free cash flow profile, generating £18.6 million in cash from operations after tax, and again investing only £8.7 million of that. So the net cash position has improved dramatically over the last couple of years.
The company's main bakery is in Birmingham, and it is thinking about a new one in Manchester. That would make for considerable increase in capex in the short-term, but hopefully would generate similar returns to that which the company is currently achieving on its capital:
This is one where I haven't spotted any red flags yet. The plan is to open 20 new stores per year, which will of course mean that the percentage growth rate will decline over time if it is achieved, but would still be a highly satisfactory outcome from an investment point of view.
At some point it will have to run out of road, but for now the runway sounds like it can last into the medium-term at least:
We continue to target new towns and cities for store openings and in the year opened in twelve new geographical locations. Many of these stores are performing ahead of expectations and reinforces the demand for the Patisserie Valerie brand.
Due to the highly cash generative nature of the business, the rollout programme is funded entirely from operating cash flows. All of our new stores were profitable from the first week of trading and we expect all of these stores to achieve the payback target of 24 months.
As you might expect, the shares are not cheap, at 20x the net income just achieved, and c. 18x on a forward basis.
But I can't imagine that will seem expensive in a few years if it executes its plans. So I'm putting Patisserie Holdings (LON:CAKE) on my watchlist for a potential purchase.
"Can LSE:EHG:Elegant Hotels' valuation criteria coincide with a fundamentally sound business?At 87p, the Barbados-based luxury hotel owner/operator trades on a whopping 50% discount to intrinsic net asset value, a prospective yield over 8% and a ..."
Yes its possible as there seems to be no market news on the company , although I did not think he has that much influence on the share price it would appear I was wrong. FWIW I am holding although I do respect Paul's opinion
For that reason, I've ditched most of my shares in other hospitality, or retail shares. In the case of Patisserie Holdings (LON:CAKE) I've had a couple of disappointing store visits, and feel the valuation is probably now high enough. It's managed to mitigate cost increases so far, but will that continue? Customer service standards slip if staffing is reduced. The figures look great for this company, but can it maintain such a high operating profit margin? I'm not sure it should try to - because if the operating margin is too high, then customers might become disillusioned with the poor value for money, and decline to visit in future.
My opinion - you may have guessed by now that I like these figures! This company really is a class act. Luke Johnson owns 38.6% of the company, so I'm very happy to be riding on the coat tails of this very experienced & highly regarded entrepreneur.
Hospitality is cooling as a sector at the moment. This is due to problems with rising costs, and over-capacity. Several companies in the sector have reported a decline in profits, and slowing or halting expansion plans.
As always, the best companies sail through troubled waters, taking the problems in their stride. That's exactly what's happening here. Cost pressures have been mitigated, it's just a really well-run business, with an excellent format.
I like the comments about expansion overseas now being considered.
Eventually, I reckon this company is likely to be sold, for a decent premium. This is alluded to by several brokers today.
EDIT: Many thanks to one of our star members, Bestace, who has flagged up a results presentation on CAKE's website. Well worth a read - it's here.
Our view: Patisserie continue to deliver strong results. Although the gross margin has dipped slightly from 78.3% a year ago to 78.0% due to high inflationary pressures on food costs, EBITDA margin has improved from 21.1% to 22.0%. This resulted pre-tax profit and EBITDA grew faster than the revenue growth, therefore led to earnings per share enhancement and ability for +20% hike in interim dividend, in line with its progressive dividend policy. The Group opened second store in Northern Ireland and first international store in the Republic of Ireland, which is highly encouraging as the success of these can lead towards accelerated store expansion plan internationally. The Group has noted that its Republic of Ireland store is performing well. Looking ahead, the Group said post period trading has been good and is remain on track to open 10 additional new stores this year, while retaining rich pipeline of further new sites. In terms of costs, the management noted that prices of majority of core ingredients post the period has now stabilised at normalised levels. Other costs such as rent and the Business Rates have relatively benign effect, while National Minimum and National Living Wage increases implemented in April 2017 and the next stage of the National Living Wage increase will add c.£0.5m on cost. The Group is continuing to mitigate these impact through more effective labour rostering method and other areas of scale benefits. Together with further supply chain improvements and operational gearing from the growing group, the management expect broadly flat gross margin in FY2017. Although concerns over wage pressure and ingredient price inflation persists, given its track-record of growth, management confidence as well as strong balance sheet, growth momentum is ongoing. The shares are valued at FY2017E and FY2018E P/E multiples of 21.5x and 18.6x, along with dividend yields of 1.0% and 1.2%. Beaufort reiterates its Buy rating on the Shares.
Another negative experience to report unfortunately
I went to the Tunbridge Wells cafe on Saturday at about 3pm. About half of the items on the menu had already sold out. No scones, no eclairs, no mille feuille, really poor stock management and disappointing as a customer.
The menus were also tatty & dog-eared.
Also as a customer I wasn't impressed that they don't take American Express, it rather undermines the premium image.
Important message from the Financial Conduct Authority:
Posting inside information that is not public knowledge, or information that is false or misleading, may constitute market abuse.
This could lead to an unlimited fine and up to seven years in prison.
If you have any information, concerns or queries about market abuse, click here.
The content of the messages posted represents the opinions of the author, and does not represent the opinions of Interactive Investor Trading Limited or its affiliates and has not been approved or issued by Interactive Investor Trading Limited.
You should be aware that the other participants of the above discussion group are strangers to you and may make statements which may be misleading, deceptive or wrong.
Please remember that the value of investments or income from them may go down as well as up and that the past performance of an investment is not a guide to its performance in the future.
The discussion boards on this site are intended to be an information sharing forum and is not intended to address your particular requirements.
Whilst information provided on them can help with your investment research you need to consider carefully whether you should make (or refraining from making) investment or other decisions based on what you see without doing further research on investments you are interested in.
Participating in this forum cannot be a substitute for obtaining advice from an appropriate expert independent adviser who takes into account your circumstances and specific investment needs in selected investments that are appropriate for you.