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Cake Box looks to move past reporting concerns

While headline revenue and profit growth is tasty, control and reporting failures have hit the shares this year
June 27, 2022
  • Attractive free cash flow yield
  • Gross margin down

Cake Box’s (CBOX) shares have tumbled since January and are down by more than 40 per cent over the last 12 months, after “transcription errors” and “inconsistencies” in inventory reporting and other disclosures in the egg-free cake retailer’s 2021 annual report were revealed following analysis from a financial blogger.

These results – along with management changes and work with the internal auditor to improve the control environment – should assuage some concerns. Revenue was up by more than a half and pre-tax profits soared, albeit against lockdown-hit comparatives. A chunky free cash flow yield of over 6 per cent and good growth in franchise stores, with 28 net openings taking the company to 185 units at the year-end, are positive signs as the company looks to future growth. It was no surprise, then, that the shares rose by more than 10 per cent on results day.

But new stores hit the gross margin, which fell by 190 basis points, as there was a lower relative contribution from higher-margin products. And in other bad news, the “issue concerning technical compliance with the Companies Act 2006 in relation to past dividend payments” flagged earlier this month hardly instils confidence (although this has no impact on reported results).

Shore Capital analysts describe Cake Box as a “capital-light, cash-generative and long-term growth business”. The shares are trading at 12 times the house broker’s financial year 2023 earnings forecast, which is certainly cheap. But we are keeping a close eye on the control and reporting situation, and move to hold until it becomes clearer that the business has thoroughly dealt with and moved past recent issues. Hold. 

Last IC View: Buy, 395p, 8 Nov 2021

CAKE BOX (CBOX)   
ORD PRICE:185pMARKET VALUE:£74mn
TOUCH:184p-188p12-MONTH HIGH:428pLOW: 135p
DIVIDEND YIELD:4.1%PE RATIO:12
NET ASSET VALUE:41pNET CASH:£2mn
Year to 31 MarTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
2018*12.83.34-2.70
201916.93.817.513.60
202018.73.767.821.60
2021 (restated)21.94.218.425.55
202233.07.7415.87.60
% change+51+84+87+37
Ex-div:25 Aug   
Payment:27 Sep   
*Pre-IPO figures