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Questor: ambitious growth plans and a healthy balance sheet make Franchise Brands a hold
Questor share tip: the shares are not cheap but there is scope for further acquisitions to supplement the firm’s organic growth
A solid trading update and an earnings-enhancing acquisition last month have got us off to a good start with Franchise Brands. The shares have risen by 28pc since our initial analysis in August and there could be more to come.
Franchise Brands has paid a maximum of £12.5m in cash and stock for Willow, a water pumps and drainage specialist, which will add to the range of services offered by the MetroRod and MetroPlumb operations, enhancing their long-term growth prospects and therefore the fee income paid by franchisees to Franchise Brands itself.
The businesses are already going well. The trading update said that sales had increased by 15pc at MetroRod and that franchisees continued to join. Meanwhile, Franchise Brands has so far added 54 franchisees to its ChipsAway, Barking Mad and OvenClean operations.
The firm is still in the early stages of development so won’t be suitable for all investors by any means, especially as its shares trade on a pretty racy forecast earnings multiple of 26 and yield less than 1pc.
But patient investors may want to back the firm, given the support it enjoys from franchise industry specialists Stephen Hemsley and Nigel Wray, their ambitious growth plans for Franchise Brands and its healthy balance sheet, which provides plenty of scope for more deals like Willow to supplement organic progress.
It is still early days but Franchise Brands appears to be on the right track.
Questor says: hold
Ticker: FRAN
Share price at close: 107p
Breedon Group
This column will now take its first look at Breedon, the construction materials specialist. Shares in the firm, a provider of aggregates, asphalt, cement and concrete, have been weak thanks to a combination of concern over the fundamentals of the business and some technical issues, notably a stock “overhang”.
Acquisitions have increased debt and the firm’s risk profile at a time when the economy has been weak and fears of a downturn have grown. The company does not pay a dividend, further bolt-on deals are possible and the share count has gone from 1.1bn to 1.7bn thanks to the stock element of its purchases.
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Meanwhile, Peter Tom, the founder, retired as executive chairman in May and sold about half of his 2.6pc stake; Neil Woodford liquidated his 6.8pc holding as his troubles grew; and a further 8.3pc block of stock relating to an acquisition made in 2016 was sold this month.
As a result, the shares are no higher than four years ago, even though sales, operating profits and earnings per share are expected to reach £940m, £117m and 5p against £319m, £38m and 2.7p, according to the consensus of analysts’ forecasts.
The increase in the share count has something to do with that and so does the increase in debt, because higher debt means higher risk and higher risk means a lower earnings multiple.
But there are positives, too. Operating margins have been consistently above 10pc as acquisitions have been efficiently integrated (and management has a 15pc target). Interest cover is still very good at more than 7.5 times, based on the first-half numbers. Analysts predict a maiden dividend in 2020.
Moreover, both of the main political parties are promising to spend a lot more to try to get the economy going.
Even though, at the time of writing at least, we still await the final details of their policies in their respective manifestos, some of this proposed largesse could well filter down to providers of key building materials such as Breedon.
A forecast price-to-earnings ratio of 12 is not demanding and the shares could reward patient support.
Questor says: buy
Ticker: BREE
Share price at close: 59.8p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.