Cooks Global Foods (CGF) is ready to take the Esquires Coffee House franchise to the next phase, with a new plan to fund its trajectory and key relationships in place to significantly expand its presence in China. It also plans to establish a beachhead in the US market in the next 12 months. The New Zealand-listed company has embarked on a growth strategy to lift its presence from 77 stores to 710 stores by FY21. Our DCF valuation of NZ$0.23/share post-recapitalisation is based on this strategy’s success.
CGF’s business plan is to significantly grow its Esquires Coffee House franchise business from its current 77 stores into a major international brand across Europe, the Middle East, Asia and North America. The company expects to have 710 stores (all franchised) by FY21, from which it will earn royalties paid by franchisees, revenue from the sale of master franchises and sales from coffee and other products to the franchises. In the near term, the company expects to build flagship stores in new territories such as the US and then sell them on as it establishes master or regional franchises. It has also been sharing the cost of updating its UK stores with the franchisees, with an immediate benefit of a sales uplift. CGF has plans to bring its coffee roasting in-house, which should deliver mid-teens earnings improvement in the medium term.
The company has announced a significant restructuring and capitalisation plan which, subject to shareholder approval, will result in one if its key Chinese partners, Jiajiayue Group (JJY), becoming a 25.3% shareholder. JJY and CGF chairman Keith Jackson have negotiated to jointly acquire all but 1m shares of the 40.38% stake held by DSL Management and plan to inject NZ$9m into the company in exchange for 70.3m shares. It is proposed that a further NZ$9m be sought via a public offer to help fund the company’s growth plans. This will position the company to focus on driving store growth in existing and new territories and help create a war chest for additional acquisitions.
Our DCF valuation (post-transaction) is NZ$0.23 a share, 92% above the current share price. The valuation is based on a WACC of 10.7% and a terminal growth rate of 2.0%. It is also predicated on CGF achieving its goal of rolling out 710 stores by FY21. In the near term, the share price may experience headwinds as the company completes its proposed recapitalisation plan and raises another NZ$9m.