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Can Domino’s Pizza gurus repeat success with another franchise business?
A man walks into a bar. He says: ‘I want to unblock a drain, look after a dog and fix a scratch on a car’.
While this sounds like a joke, it doesn’t have a comedic punch line. Instead, it’s an accurate description of a £47m business quoted on AIM called Franchise Brands (FRAN:AIM).
There’s very good reason to take a closer look as it’s fairly easy to see why some investors are excited about its prospects.
Franchise Brands is run by executive chairman Stephen Hemsley who is considered to be one of the UK’s experts on franchise businesses. He’s credited with driving the rapid growth of Domino’s Pizza (DOM) in the UK, having been chief executive of that business between 2001 and 2008 before shifting to the chairman’s role which he still holds today.
He founded Franchise Brands with well-known investor Nigel Wray in 2008 and both of them are still major shareholders owning a combined 54% stake. Wray was also a shareholder in Domino’s for a long time, turning a £6.1m investment in the pizza business into an estimated £137m by the time he sold out completely in 2013.
DOMINO’S MARK 2?
It’s no wonder the pair attracted decent interest when Franchise Brands floated on the stock market in August 2016. ‘Some of our bigger investors want us to do a repeat of Domino’s and make them rich again,’ comments Hemsley.
Helping the cause is the fact that Hemsley has recruited a few other Domino’s alumni including the group’s former marketing and IT directors.
Franchise Brands’ task is to help franchisees to become more efficient operators and win more business. The more money generated by the franchisees and the less help they need to operate smoothly, the greater the amount of money that goes into Franchise Brands’ pocket after costs.
EASY TO UNDERSTAND
Franchise Brands has a fairly simple business model. It owns various franchise companies and earns money from franchisees through start-up charges and monthly income from licence fees and product sales.
It provides central services which can be applied to any of the franchise companies in its portfolio, namely national brand marketing, customer lead generation, recruitment, training, support and IT. All franchisees pay money into a national advertising fund.
The biggest operation in its portfolio is Metro Rod which provides business-to-business drains clearance, maintenance and plumbing services in the UK. It has approximately 3,000 customers on 30,000 to 50,000 premises.
Hemsley wants it to become a £100m turnover business. That’s about five times the level it achieved in 2016. ‘We’ll have to invest a lot in IT and franchisees will need to invest in equipment. That will take all of 2018 to achieve.’
Metro Rod has framework contracts to provide reactive services, such as working for a facilities management business who’d have a contract with the prison service, for example. ‘Very often unblocking a drain on a reactive basis reveals a bigger problem with the drain. We would then quote to do the underlying repair.’
It also undertakes planned preventative maintenance such as cleaning fat and grease from drains. ‘Metro Rod has good visibility and we know how often this type of work will happen.’
Metro Plumb, another business in the Franchise Brands portfolio, works for the likes of AXA and AA (AA.) doing home plumbing for customers with emergency response policies. ‘Insurers’ predictive models are uncannily accurate. We can plan our labour force and not sit around waiting for the phone to ring,’ says Hemsley.
A FEW WEAK POINTS
A business called Kemac was inherited as part of the Metro Rod acquisition in April 2017. ‘It was a basket case. It was formed to help improve water pressure issues in tall buildings and has gone through many different owners. Unlike our other companies, Kemac is a direct labour business.’
Kemac’s poor performance in the months following the Metro Rod acquisition forced analysts to downgrade their earnings forecasts last September at the group’s half year results. Since then, Hemsley says the business has been restored to profitability and hints it may be sold.
The executive chairman says another part of Franchise Brands is ‘more or less defunct’, being the MyHome cleaning business. That leaves ChipsAway, Barking Mad and Ovenclean as the core interests alongside Metro Rod and Metro Plumb. All have growth potential, he says.
ChipsAway specialises in on-the-spot repair of cars with scratches and dents. A big part of the business is working with fleet managers as its repair costs are cheaper than a body shop. It originated as a man-in-a-van operation but Hemsley says there is now an opportunity to increase scale by some franchisees having premises.
‘The rise of park assist, and autonomous vehicles in the future, suggests a franchisee may benefit from having certain equipment to help recalibrate car systems during the repair. That’s better suited to being done in small premises and not out the back of a van. Having premises may also warrant doing more respraying jobs as well.’
Barking Mad is a profitable dog sitting service and has an estimated 20,000 active customers. Franchisees are turning over £70,000 to £80,000 each, keeping below the £85,000 turnover level at which they must pay VAT.
As such, franchisee turnover is unlikely to get much higher, yet Hemsley does believe there is scope to introduce many more franchisee territories in the UK and potentially triple the size of the network.
Franchise Brands has approximately £6m net debt position. We expect debt to fall fast over the next few years given the cash generative nature of the business. Further acquisitions may change this situation, of which there are plenty of targets according to the chairman.