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Cake Box accounting concerns setting up attractive entry valuation


Cake Box Holdings LON:CBOX, the UK-listed purveyor of high-street, fresh cream cakes released full year results on Monday 27th of June. Despite the current environment, results at the franchise operator were buoyant. Revenue to the 31st March 2022 grew 50.7% to £33 million, driven by strong cake sales and the opening of 31 new stores during the period.

Whilst gross margins slipped slightly to 47.9% from 49.8% the year prior, Cake Box’s strong cost control across the group resulted in an increase in EBITDA margins and an 88% jump in earnings per share to 15.8p. The board announced a final dividend of 5.1 pence per share, bringing the total dividend for the year to 7.6 pence per share, providing a trailing dividend yield of 4% for the shares at today’s price.

Maynard Payton investigation prompts management changes

Typically, the shares of companies that report such buoyant trading, especially through organic means, would be subject to a strong post results uplift. In the case of Cake Box, the shares are largely unmoved since Monday’s release and are still suffering from a 53% fall from all-time highs after investor confidence in Cake Box’s management was shattered by the investigations of private investor and investment journalist Maynard Payton.

In the investigative report published on Sharescope, errors were revealed in Cake Box’s financial reporting and governance issues were brought to light. The company responded to the investigation suggesting that financial errors were unlikely to have an impact on full year profits. However, in the time since the publication, Cake Box has replaced its CFO and added both a Chief Commercial Officer and Chief Operating Officer to the business.

These revelations are an unfortunate circumstance for Cake Box, which has been delivering great results for both franchisees and shareholders since listing in 2018. Cake Box’s franchise model has meant that growth has largely been funded by franchisee capital, resulting in a healthy balance sheet for the company and no increase in nominal share volume since the 2018 IPO. In 2022, Cake Box ended the year with 185 stores and has continued to innovate with its Asda Kiosk roll-out plan.

Despite governance issues, Cake Box has managed to retain some notable shareholders, such as Fidelity, Ennismore and Amati Global, who sit alongside CEO Sukh Chamdal, who owns 32% of the company. Popular investment house CRUX Asset Management recently re-added Cake Box into their European Growth portfolio in Q1 2022, issuing the following commentary in their latest update.

‘We re-entered the previous holding Cake Box, which had fallen almost 40% on overdone accounting concerns. We expect continued strong execution on the company’s long-term franchise plans.’

Positive trading outlook

In the latest update, Cake Box highlighted a positive trading outlook for the year ahead and set an ‘ambitious but realistic’ target of 24 new store openings, which will bring the store estate to 209, comfortably within range of its long-term target of 250 stores in the UK. In light of events so far this year, Cake Box management were also enthused to relay the defensive prospects of the celebration cake service, which – throughout economic uncertainty – has continued to prosper.

‘The Cake Box Family is bigger than ever before, and we are serving more customers than ever, with a keen focus on value for money. As I said at the height of the Covid pandemic, there will still be birthdays, marriages and countless moments in our lives to celebrate with a slice of our delicious, egg-free cake.’

Sukh Chamdal, CEO, Cake Box

With significant share price declines in 2022, Cake Box sits at an attractive valuation for a business with impressive financial metrics. Forecast earnings estimates for 2023 suggest a result of 14p in EPS for the year, deriving a P/E of 12 for the company. Investors willing to look past recent financial reporting blunders could be handsomely rewarded. However, in an industry still living with memories of the Patisserie Valerie scandal, it may be some time before confidence in management, and the health of Cake Box’s share price, is restored.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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