Doubled down on CBOX

Following my own due diligence and meeting with management.

It’s very difficult to find words to explain the current situation. After 2 years of covid, we are on the brink of a third world war. Never did I imagine world leaders would be capable of this kind of atrocity ever again. It’s even more difficult to find reason to buy anything in these markets right now; inflation is only getting worse, and earnings expectations are coming down across the board. Unless you are trading, the best thing to do is to know what you own and switch off if you can.

In deciding whether to hold or fold, this week I met with CBOX management. I knew Mr Sukh Chamdal (CEO) had a reputation of being approachable so I contacted the company in light of the recent “accounting issues” and I was very pleased he agreed to see me and answer some questions. In fact, the first thing Mr Chamdal said was, ‘‘ why don’t these people just talk to us, we’ve got nothing to hide and we’re happy to answer any questions”. He was visibly frustrated by the whole thing, upset by the fall in the sp and reiterated that this has nothing to do with the underlying business. They are the busiest they’ve ever been and he remains committed to the long term success of the business. He also stressed that he would have bought back shares at these levels but unable to as the concert party (CEO & CFO) already own just under 30% and crossing that threshold will require a bid for the entire company.

I think there is an acceptance that some admin errors have been made in the past but every effort is now being made to improve internal compliance & procedures and personally, I think that lessons have already been learned.

Mr Pardip Dass (CFO) helped explain most issues related to the accounts, like the ageing of payables. This relates to the initial deposit paid by the franchisees and because it is refundable up to the point where they found the right location and signed the lease, it becomes a payable in the accounts. Cbox will not force the franchisees to take a location they’re not happy with, so in some instances the process can drag on for up to a year. As I understand it, the invoices have a 30 day period payable within 7 days after that and there are no issues there, but I think if there were any sort of late payments, it would most likely be money owed from the setting up process as opposed to money owed once they start trading. Perhaps the company should publish the ageing of receivables as well as the payables.

Regarding the auditors’ resignation, I think the relationship became difficult with both sides wanting out and the auditors are required to file a resignation letter with the companies house. The main point they raised -the GDPR breach is not really an auditor’s issue, the trouble with GDPR is that once you become aware of a breach you have 72 hours to report it, after that you are liable to a fine of up to 4% of the revenue. It’s very complicated and many small co’s still grapple with this issue. The historical errors I believe are to do with manual inventory reporting and these issues are being addressed. The co holds very little sponge inventory as it’s perishable.

Another thing I wanted to raise was the related parties franchisees and Mr Chamdal said there’s nothing he can do about that. There are 10 family franchises( c 5% of the total) they’ve been part of the success story from the beginning and as the business keeps growing, it will become a less material weighting.

The most frustrating thing for the management was the comparison in the media with Patisserie Valerie. Two fundamentally different business models that happen to sell cakes. PV was an eat-in cake shop with high overheads while Cbox is a celebration cake, take away and capital light franchise model. It’s like comparing apples with monkeys. Personally, I remember very well PV’s demise: none of the regular financial commentators even suspected, it was a calculated and well organized fraud. If CBOX was to do the same thing, they would have done a much better job with the accounts and they would have made sure that no suspicion would ever arise. Also, they cannot manipulate finances of a 3rd party franchisee, they do not have control over that. PV did have control over its entire estate.

And finally, when you have management that’s willing to engage and answer questions, admit mistakes have been made and they are being put right, you have to give them a second chance. That’s my own firm view anyway so I doubled down on my investment at 10 times forward PE, let’s see where the share price is 6-12 months from now. Special situations asset manager Crux took a 4.2% stake whilst others undoubtedly decided to exit , but this is what makes a market.

Mr Chamdal will be the keynote speaker at the International Franchise Show on 8-9th of April London 2022.

(This is not investment advice and please do your own research).