Daily Stock Market Report (Wed 12 Mar 2025) - FOUR, LGEN, IGP, GYM, HILS, CBOX, PPHC

Good morning! Here's the agenda for today's report.

1.20pm: all done for today.

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Companies Reporting

Name (Mkt Cap)	RNS	Summary	Our view (Author)
Legal & General (LON:LGEN) (£14.4bn)	Full Year Results	Core op profit +6% (£1.6bn). Op ROE 34.8% (LY: 26.6%). Strong momentum. £500m buyback.	GREEN (Roland holds) Today’s numbers show positive progress with the group’s simplified strategy. Cash generation continues to support the near-9% dividend. On a FY25 P/E of 10, I think the shares remain decent value for income.
Balfour Beatty (LON:BBY) (£2.2bn)	Full Year Results	Underlying operating profit +7% (£252m). Divi increase and £125m buyback. Positive outlook.
Hill & Smith (LON:HILS) (£1.39bn)	Full Year Results	Profit ahead of exps. Revenue +5% (constant FX). ROIC up to 24.8%. Outlook: well positioned.	GREEN (Roland) While performance in the UK weakened last year, the US now provides the majority of earnings and appears to have a more positive outlook. I think HILS’ valuation looks reasonable for a business with proven quality characteristics and solid forecast earnings growth.
4imprint (LON:FOUR) (£1.35bn)	Final Results	PW. Orders slightly down in 2025, challenging environment. Brokers cut 2025 forecasts, e.g. PBT -6%.	BLACK (AMBER/GREEN) (Graham) I’m downgrading our stance on this by just one notch, despite this profit warning. 4imprint might still be considered a company of the highest quality and its earnings multiple is now modest at around 13x. So despite the profit warning, I think there are some reasons for cautious optimism from the current level.
Hochschild Mining (LON:HOC) (£987m)	Preliminary Results	Rev +37%. Adj. PBT $199m. Restores dividend. New dividend policy: 20-30% of FCF.
Forterra (LON:FORT) (£339m)	Full Year Results	Revenue flat. H2 weighting. Adj. PBT -29% (£22m). Net debt £85m, leverage 1.9x to reduce further.
MaxCyte (LON:MXCT) (£270m)	Q4 & FY 2024 Results	FY24 rev -6% to $38.6m, opex $82.7m. Cash $190m at 31 Dec. FY25 core rev exp +8 to 15%.
GYM (LON:GYM) (£242m)	Full Year Results	Rev +11%, LFL +7%, avg members +4%. Adj PBT £3.6m (FY23: £(5.5m)). YTD rev +8%.	AMBER/RED (Graham) I’m still AMBER/RED on this although today’s results do show a significant improvement against 2023. But the lack of real profits or barriers to entry leave me holding on to a moderately negative stance.
Public Policy Holding (LON:PPHC) (£162m)	Preliminary Results	In line. Rev +11% to $150m, inc 3% org growth. Adj EBITDA +3% to $36m. Strong momentum YTD.	AMBER/RED (Graham) This US-based lobbying group is enjoying improved organic growth and plenty of demand in the new political environment. However, its very large share-based accounting charges (and other adjustments) have unnerved me.
Intercede (LON:IGP) (£81m)	Contract wins ($1.4m)	Wins and extensions in AsiaPac and US federal space totalling $1.37m. No change to guidance.	AMBER (Megan) It’s good to see continued momentum in the company’s ability to sign contracts. But the shares still look a little rich at current levels. If 2025 and 2026 forecasts turn out to be conservative, it might be worth turning more positive.
Cake Box Holdings (LON:CBOX) (£76m)	Acquisition & £7.2m Fundraise	Acquiring Ambala Foods for £22m w/ £15m loan, £7m placing, £0.2m retail offer. 12x TTM EBITDA.	AMBER/GREEN (Roland) This is a sizeable deal for a company of this size, but Ambala does seem a decent fit and the opportunity looks logical to me. Increased operational risk and financial leverage mean I’ve tempered our view slightly, but remain broadly positive.

* Market caps at previous trading day’s close

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Graham's Section

4imprint (LON:FOUR)

Down 17% to £39.55 (£1.11bn) - Final Results - Graham - BLACK (AMBER/GREEN)

4imprint Group plc (the "Group"), a direct marketer of promotional products, today announces its final results for the 52 weeks ended 28 December 2024

2024 results are in line - in some ways slightly ahead - of forecast.

However, I note that Cavendish have made some meaningful cuts to 2025 forecasts today, in light of a weak start to the year for the company and the potential impact of tariffs.

Panmure Liberum have done the same, “to reflect the macro”.

Therefore today’s announcement serves as a profit warning.

A quick review of 2024:

• Revenue +3% ($1,368m)

• Operating profit +9% ($148m)

• Special dividend 250 cents or 193p, on top of regular dividend 240 cents or 186p.

There’s a helpful breakdown of expense by function; note the marketing spend which Paul previously argued was discretionary (here) but which is also a key ingredient to their success, as they benefit from brand awareness in the United States. Please note that 98% of FOUR’s revenue comes from the US and Canada.

The Chairman comment includes the profit warning:

"The Group delivered a strong financial performance in 2024, continuing to outperform the promotional products market as a whole and thereby taking further market share.

In the first two months of 2025 revenue at the order intake level was slightly down compared to the same period in 2024, reflecting continued uncertainty in the market. It is possible that market conditions, including potential tariff impacts, may continue to influence demand in 2025. From our experience, however, as business sentiment improves, demand for promotional products increases as does our ability to gain market share.

Despite a challenging near-term environment, our view of the prospects of the business remains unchanged. The Board is confident in the Group's strategy, competitive position and growth opportunity."

Their confidence in the future is perhaps highlighted by the decision to pay a bumper special dividend that serves to double the total payout to shareholders for the year.

Balance sheet: the proposed final dividend plus the special dividend are estimated to cost $115m in 2025.

But looking at the Dec 2024 balance sheet, it’s healthy with net assets of $185m, almost fully tangible.

It’s a surprisingly small, simple balance sheet, which hints at the quality of the business model.

PPE is very light for a company of this size (less than $50m).

And there is almost nothing in liabilities except for some trade payables.

Indeed, non-current liabilities are only $5.5m! Is there any FTSE-250 business with fewer non-current liabilities than this?

Graham’s view

We were GREEN on this at a share price of £55 and a higher earnings multiple.

The shares have been unable to sustain those higher multiples and it seems that the market was right to be cautious, given the earnings downgrades today.

The latest forecasts from Cavendish suggest earnings per share of 394 cents in 2025, and then 416.2 cents in 2026 (both down around 6%).

After this morning’s share price fall, I calculate that the shares are now on a PER of about 13x.

This is very unusual for the company - it more typically trades in the high teens or the 20s.

However, US tariffs are a problem with an uncertain and potentially serious impact. The promotional goods sold by 4imprint are largely sourced from China. Tariffs can be mitigated by sourcing them elsewhere (at greater expense, inevitably) and by passing on price increases to customers. But that is unlikely to do much for demand or for the company’s margins. Revenue growth was already very modest in 2024, before this problem arose.

I’m therefore going to downgrade our stance on this to AMBER/GREEN, to reflect that additional caution is needed in the light of this profit warning and unknown tariff impact.

Against that, the company might still be considered top-drawer in terms of quality (QualityRank 97) and its earnings multiple is modest. So if it can somehow avoid giving us another profit warning, then there are reasons to think that its valuation should hit a floor reasonably soon. So a moderately positive stance seems fair.

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GYM (LON:GYM) 

Up 2% to 136.8p (£246m) - Full Year Results - Graham - AMBER/RED

I downgraded this to AMBER/RED in January (at the pre-close trading update) having lost patience with the length of time taken by GYM to demonstrate economies of scale and produce real profits.

Today we have confirmation of results for 2024. Some highlights:

• Revenue +11% (like-for-like revenue +7%)

• Adjusted EBITDA (not relevant due to capital intensity) +16% to £87m

• PBT improves from a loss of £8.3m to a profit of £2.5m.

Net debt has reduced by 8% to £61m, excluding leases.

The company argues that operational leverage is visible in these results and I acknowledge that there has been a substantial improvement over 2013.

But I don’t agree with this:

Return on Invested Capital ('ROIC') of mature gym sites of 25% (2023: 21%), delivering medium term guidance early; ROIC increases to 27% after excluding 13 workforce-dependent gyms

Check the footnotes and you find that the ROIC definition calculates profit as “EBITDA less Normalised Rent”. I’m afraid I can’t get behind EBITDA in the context of a gym (or a restaurant, or a cinema).

I understand that the operator of a capital-intensive leisure site needs to understand cash flow, but the owner needs to understand real profits, after the cost of fitting them out and then suffering depreciation.

I also think it’s a stretch to exclude 13 “workforce-dependent” gyms. Yes, people’s commuting habits have changed. But I just don’t think that’s enough of a reason to exclude the worst-performing sites from calculations.

Business and operational highlights: from a customer and employee perspective, GYM seems to be performing very well. High rates of customer satisfaction, and employee engagement.

Current trading/outlook is positive although I think we should place a lot more emphasis on like-for-like revenue growth (3%) and the growth in yield (price paid for membership, up 4%) rather than the growth in total revenue (8%). Growth in total revenue is boosted by site openings and the maturing of new sites:

Trading momentum remained strong in our peak recruitment months of January and February; revenue after two months has grown by 8% year on year, reflecting a 4% increase in average members and 4% growth in yield. Like-for-like revenue up 3%

Group Adjusted EBITDA Less Normalised Rent for FY25 now expected to be at the top end of the recently revised analyst forecast range of £49.0m-£50.8m, driving further improvement in mature site ROIC

Plan to open 14-16 new sites in 2025, in line with our plan to open c.50 sites over three years funded from free cash flow; leverage expected to remain below 1.5x

Graham’s view

Perhaps AMBER would be fairer, but I just can’t get away from how long it has taken this company to generate real, meaningful profits despite already reaching quite a significant scale with nearly 250 sites.

This is a sector without any barriers to entry that I can see and so I’m not even convinced that if it did turn profitable, that the profits would be sustainable.

PureGym has 400 gyms and I’m not sure that it’s really profitable either - according to a press release published last year, it made an adj. EBITDA of £132m in 2023. I wonder if that converted into real profits?

Turning specifically to the Gym Group, it says that it generated a free cash flow for 2024 of £37.5m. This was boosted by a £9m movement in working capital, so the real figure is c. £29m. It spent an equivalent amount (£28m) on expansionary capex to grow the estate.

Therefore, if you trust the company’s adjustments and calculations, it’s only trading at around 8x adjusted free cash flow (market cap £249m divided by free cash flow adjusted for working capital, £29m). You might want to adjust this higher for net debt.

So from that point of view, the current share price is fair and I should be AMBER.

I also note that PureGym achieved a £600m valuation back in 2017. If private equity took an interest in it, perhaps they could envisage a higher valuation for GYM than the stock market is currently giving it.

However, I think ongoing caution is justified due to the leverage, the capital intensity, the track record of minimal “real” profits (on the income statement), and ongoing vulnerability to competition and the macro environment. It’s unlikely that PureGym and the Gym Group would be permitted to merge - the last time they considered it, the CMA got involved with an investigation.

Therefore, for me, this is still an AMBER/RED.

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Public Policy Holding (LON:PPHC)

Unch. at 135p (£162m / $210m) - Unaudited preliminary results - Graham - AMBER/RED

Public Policy Holding Company, Inc., the leading government relations and public affairs group, today announces its unaudited preliminary results for the year ended 31 December 2024 ("FY2024" or the "Period").

It looks like we’ve never covered this one before. It’s a 2021 IPO that hasn’t crashed - that’s an achievement!

The shares are very thinly traded on most days which makes we worry that there could be a dominant shareholder - but that’s not the case. Instead there are various individuals with large-ish stakes:

PPHC is “a family of premier advisory firms specializing (US-based) in government relations and public affairs communications strategies”. My impression is that it’s mostly focused on lobbying in the US - both federally and at the State level. That must be interesting work these days!

Some highlights from today’s full-year results:

• Revenue +11% to $149.6m. Organic growth 3% plus acquisitions.

• Underlying EBITDA +3% to $36.1m.

• Underlying EPS of $0.2345 was flat.

I will have to dock the company some points for presenting a highlights table which is almost entirely focused on “underlying” (not statutory) numbers, and which includes an extra column for “adjusted” underlying numbers!

Also, there is a horrible gap between underlying net income and the actual net loss, both in 2024 and in 2023.

In both years, the entire underlying net income was eaten up by enormous share-based accounting charges, which is just another form of management remuneration.

In addition to the share-based accounting charges, there are LTIP charges worth a few million dollars and payments to managers of acquired companies (“Post-combination comp”).

I get that this is a people-based business and that management need to be paid well, but why present underlying numbers that leave out huge elements of these payments?

Net debt is $17.5m following two acquisitions.

The outlook is positive and the election of President Trump appears to have stimulated demand:

The Group has strong trading momentum in FY2025, with organic growth rates year-to-date well ahead of FY2024. The strong strategic execution and robust results achieved during FY2024 give the Board confidence in FY2025.

Following the US elections, management has observed significant new business activity in the United States.

They see themselves as “as a natural consolidator with favourable bipartisan positioning” in the fragmented market for public affairs and professional lobbying services”.

Medium-term guidance:

• Organic rev growth of 5-10%

• Incremental growth from future M&A

• Underlying EBITDA margin 25-30%

Graham’s view

I don’t have a negative impression of this business in terms of its structure or its market positioning, but as an investment there is a fly in the soup: it doesn’t make any money, at least not officially.

The underlying (and “adjusted underlying”!) numbers look good at first glance, but then you realise that staff are eating those profits with share-based payments and LTIPs.

I’ve had a look at the footnotes and I think the very large share-based accounting charge relates primarily to the IPO, when many share rights were granted to employees (subject to a vesting schedule). So perhaps we can hope that these charges might calm down in the years to come.

According to today’s cash flow statement, the company did generate net cash from operations of $16.4m, with minimal investing outflows (apart from fresh acquisitions).

I don’t want to be unnecessarily harsh on a stock I’m covering for the first time, but I am going to take a moderately negative stance on this today. I think investors really need to scrutinise the large gap between the underlying numbers and the numbers on the actual income statement.

They might also question, as they would with any US-based business, why it chose to list on AIM. Was it purely opportunism relating to the conditions on London’s junior market in 2021, or was there another reason?

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Megan's Section

Intercede (LON:IGP)

Up 5% to 145p (£86m) - Further contract announcements - Megan - AMBER

Cybersecurity group Intercede has reported another flurry of contract wins to close off its 2025 financial year (which ends in March). In the final quarter, the company signed orders worth $1.37m, some of which will be delivered during the current period (although it is not entirely clear how much).

Three of the four contract announcements are with US federal agencies, building on the existing relationships that the company has there. It’s good to see continued orders from existing clients.

The final contract announcement is a 3 year subscription licence for a government client in the Asia Pacific region - a market which presents a growing opportunity for Intercede.

Revenues for the year to March are currently forecast at £16.9m. In the first half, Intercede booked £8.5m of revenues and so, with the stream of new contracts which have been signed since then, forecasts for the full year look very manageable.

In January, after the company announced $5m of new contract wins in December and management revealed the financial performance was ahead of previous expectations, brokers upgraded earnings guidance. Consensus forecasts are for earnings of 4.9p.

The dilemma currently being faced by Intercede investors is whether these contract wins justify such a lofty price to earnings ratio. Shares are currently trading on 31 times 2025 forecast earnings.

The difficulty here is that Intercede had a particularly impressive 2024, during which it signed two major contracts which sent sales up by 65% and catapulted earnings to 9.64p. Based on last year’s figures, the company is trading on a PE ratio of 14.6x, which is far more palatable.

But company valuation is not based on what is gone, but what is coming up. While earnings forecasts for 2025 have recently been hiked, at the current count, they’re expected to fall again in 2026. The current valuation would therefore suggest that investors are hoping that 2026 forecasts are incorrect and will be upgraded or they’re based on a far longer term outlook.

Intercede clearly has good ties with major clients, which is promising. It also seems to have a relatively resilient moat, which is reflected in a return on capital employed which has jumped up to more than 30%.

The balance sheet is also strong with £16m of cash - which represents a fifth of the current market cap. Although it should be noted that a lot of this cash represents the cash inflows from customers who have paid in advance for a service which the company now needs to deliver.

Megan’s view:

The momentum behind Intercede’s ability to sign contracts suggests that 2026 forecasts (and maybe even 2025 forecasts) look conservative. That makes the current valuation a bit more reasonable.

Graham and Roland have both been Amber on this following the last two updates and I am inclined to agree. A more sustained trajectory in the share price might make it worth considering this as a speculative growth investment, but for now I don’t think the momentum is heading in the right direction. AMBER

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Roland's Section

Legal & General (LON:LGEN)

Down 0.8% to 243p (£14.3bn) - Full Year Results (part 1 & part 2) - Roland - GREEN

At the time of publication, Roland holds a long position in LGEN.

When a large financial company feels the need to divide its results into multiple parts, complexity is pretty much guaranteed.

In Legal & General’s case this is certainly true. This insurer and asset management group manages more than £1trn of assets and carries c.£540bn of assets and liabilities on its balance sheet. Many of these have lifetimes stretching decades into the future.

Despite this, these shares are justifiably popular for providing a reliable and generous dividend.

I hold them for this reason – a near-9% yield means the flat 10-year share price performance is less of a concern than it might be otherwise:

However, the complexity of this business means that for most investors, the only way to digest the results is at a fairly high level.

My approach is to focus on cash generation, profitability and divisional headline results. I don’t think it’s realistic to go much deeper. With that caveat, let’s take a look at today’s numbers.

2024 results summary: today’s headline figures look broadly positive to me:

• Core operating profit up 6% to £1,616m;

• Core operating earnings up 6% to 20.23p per share;

• Operating return on equity up 8% to 34.8%

• Contractual Service Margin (an accounting measure of expected future profit) up 2.2% to £13,292m

Shareholder returns remain a key focus:

• Dividend up 5% to 21.36p per share

• £500m share buyback announced

This dividend doesn’t appear to be quite covered by core earnings of 20.2p per share. But the payout is comfortably covered by surplus capital generated last year – I use this as a proxy for cash generation in L&G’s results:

• Solvency II capital generation down 3.8% to £1,751m (29.7p per share)

• Solvency II Coverage Ratio up 8% to 232%

Adding the £500m buyback to the dividend tells us that CEO António Simões is effectively planning to return all the surplus capital generated by L&G last year to its shareholders.

Given the improvement in the group’s regulatory coverage ratio, I don’t see any problem with this.

Business commentary: Mr Simões joined L&G at the start of 2024 and is on a mission to slim down and tighten the focus of this group, while expanding in its core markets. Today’s results summarise some of the progress made so far with this strategy.

Institutional Retirement (op profit up 7.5% to £1,105m): £10.7bn of global pension risk transfer business written (2023: £13.7bn). This included £8.4bn in the UK (2023: £12.0bn) and £2.3bn internationally (2023: £1.7bn) - this is mainly the US and Canada, markets targeted for growth.

Asset Management (op profit down 10.5% to £401m): AUM down 3% to £1,135bn, but average fee rate increased from 7bps to 8bps as the company targets “higher fee margin products”. Profits were lower partly due to investment in “growth and scalability” following the merger of the LGIM and LGC divisions into a single AM unit.

Retail (op profit up 12% to £504m): gains mainly driven by workplace pensions (5.5m members) and sales of individual annuities, up 48% to £2,118m. L&G reports a 23.6% share of the retail annuity market. These products now offer more attractive income rates for retirees than during the zero interest rate era.

Disposals: the group sold its UK housebuilding business Cala for £1.35bn and its US protection business for £1.8bn.

Outlook: the company reports “a busy PRT pipeline” (pension risk transfer) and says it’s completed £1.2bn of transactions in the UK and is “actively pricing on £17bn of new deals”.

In asset management, flows into higher margin products are said to be continuing. This is being aided by a growing number of workplace pension members transitioning into a fund which offers private markets exposure (higher fees).

Shareholder returns: In line with previous guidance, dividend growth is expected to reduce to 2% per year between now and 2027.

Buybacks are becoming a greater priority. The company announced a £1bn buyback in February using proceeds from the sale of its US protection business. This is supplemented by a £500m buyback announced today.

In total, L&G intends to return the equivalent of c.40% of market cap to shareholders through dividends and buybacks over 2025-2027. That’s about £5.7bn.

Roland’s view

Leaving aside the reality that buybacks do not return cash to shareholders, I think buying back shares has the potential to generate an attractive return on investment at current levels.

More broadly, today’s results seem fine to me, with stronger performances in some areas and room for improvement elsewhere. This is what I’d expect from a mature and complex business.

I’m comfortable as long as the direction of travel is positive and the dividend remains supported by surplus cash generation. Legal & General appears to be meeting both of my requirements and also continues to look decent value to me:

Complexity will always be a risk, but Legal & General has been in business for nearly 200 years. I believe it’s likely to remain a decent choice for investors seeking a high-yield income. GREEN.

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Hill & Smith (LON:HILS)

Up 10% to 1,906p (£1.5bn) - Full Year Results - Roland - GREEN

Hill & Smith PLC ("Hill & Smith" or "the Group"), the leading provider of solutions that enhance the resilience of vital infrastructure and the built environment, announces its preliminary results for the year ended 31 December 2024.

Hill & Smith makes products such as road barriers and street lamps. While they may seem mundane and low tech, they tend to be very precisely specified and are often subject to regulatory approvals and other barriers to entry (e.g. public sector approved supplier requirements).

Therein lies this company’s competitive advantage, amplified by its scale, long history and very broad product range (worth a look).

2024 results summary: The quality of this business is on display in today’s results, which have received a warm reception from the market.

• Revenue up 3% to £855.1m

• Adjusted pre-tax profit up 18% to £132.6m

• Reported pre-tax profit up 12% to £104.5m

• Adj EPS up 16% to 122.6p

• Dividend up 14% to 49.0p per share

• Net debt of £96.9m (0.3x EBITDA)

New CEO Rutger Helbing says these results reflect “excellent performance in our US business”, which now generates three-quarters of group profits.

Continued active portfolio management is said to have helped improve the quality of HILS’ portfolio of semi-autonomous operating companies:

Four value enhancing US acquisitions completed in FY24 for aggregate expected consideration of £58.5m

Divestment in Q1 2025 of two non-core businesses

M&A pipeline remains active

These are certainly a solid set of results, but the divisional commentary does reveal a slightly more mixed performance in some areas, particularly the UK.

Engineered Solutions: revenue rose by 5% to £418.7m on an organic constant currency (OCC) basis. Underlying operating margin improved to 18.6% (2023: 17.5%). Growth was driven by strong demand for composite products in the US.

Galvanizing Services: OCC revenue rose by 2% to £197.8m. Underlying operating margin improved to 25.4% (2023: 23.2%).

The US market saw a 9% increase in volumes, with lower input costs supporting a 6% increase in OCC revenue.

The UK market was weaker, with full-year volumes up 2% but revenue down by 4%.

Roads & Security: OCC revenue fell by 9% to £238.6m in 2024. Underlying operating margin improved to 6.5% (2023: 4.7%) but was significantly lower than the remainder of the group, diluting overall profitability.

The company highlights three main areas of weakness:

• US off grid solar lighting – its largest customer “realigned inventory levels”.

• US message boards - impairment charges totalling £13.2m are announced today

• UK roads - OCC revenue fell by 4% due to “reduced demand and budgetary pressures”

These impairment charges mean that the Roads & Security division generated a statutory operating loss of £5m last year.

Profitability: despite these pressures, Hill & Smith’s overall profitability remains well above average.

The company reports a 2024 return on invested capital (ROIC) figure of 24.8% (2023: 22.0%).

Using a more standard return on capital employed calculation, I get a ROCE of 18.1%, or 22.5% using adjusted profits. Both numbers reinforce my view that this is a quality business., They're also reassuringly close to the company’s own preferred figure.

Cash generation is also excellent. I calculate free cash flow excluding acquisitions of £95m, which represents 125% conversion from reported net profit of £76.4m.

Unusually, in my experience, the company’s free cash flow is more closely aligned to its adjusted net profit of £98.6m.

Outlook: the prospects for 2025 appear to be divided along similar lines to 2024 performance.

In the US, “strong trading momentum” is expected to continue, driven by investments being made to “onshore vital infrastructure”. The company doesn’t expect a “significant impact” from current trade tensions at this time.

The UK outlook “is likely to remain challenging given budget pressures in the public sector”. But management is hopeful of “some level of recovery”.

The company continues to see “attractive growth opportunities in our Indian business”.

I don’t have access to any broker notes for this business. But consensus forecasts on Stockopedia ahead of today’s results suggest another positive year of growth:

Roland’s view

I’ve admired this business for many years and perhaps should have bought it at some point! The long-term record has been excellent:

The stock only earns an average value score from the StockRanks, but I think this is offset by the consistently high quality of the business:

Adjusting for this morning’s share price rise puts HILS on a 2025E P/E of 15, with a 2.6% yield. That’s not cheap, but this valuation looks very fair to me given the company’s high quality, low leverage and strong record of self-funded growth.

The main risk I can see is that a decent proportion of Hill & Smith’s revenue appears to have some degree of political exposure. However, the current situation in the US appears to be broadly favourable for the business and I would expect UK demand to stabilise over time.

On balance, I’m comfortable taking a positive stance here. GREEN

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Cake Box Holdings (LON:CBOX) 

Down 2% to 185p (£74m) - Acquisition & £7.2m Fundraise - Roland - AMBER/GREEN

Cake Box (AIM:CBOX), the UK's largest retailer of fresh cream celebration cakes, is pleased to announce that it has conditionally agreed to acquire Ambala Foods Limited for an aggregate consideration of £22 million, which consists of £16 million for Ambala and £6 million for Ambala's manufacturing facility located in Welwyn Garden City.

When Graham last commented on this franchisor of fresh cream cake shops, he took a positive view but noted that “like-for-like growth is not running too hot”. Perhaps today’s news is intended to help address this point by adding some complementary inorganic growth to Cake Box’s offering.

This is a significant acquisition for a business with a £76m market cap, but Cake Box reported net cash in its last accounts and the financial terms of this deal seem manageable to me.

Acquisition details: Cake Box is buying Ambala Foods and a related manufacturing facility.

Acquisition of Ambala, a leading manufacturer and retailer of Asian sweets (Mithai) in the UK since 1965. Mithai has strong cultural, religious and social importance in the Asian community.

Ambala operates from 22 stores, including 19 owned stores and three franchised stores. It’s always been family-run but it looks like succession issues may have prompted the decision to sell:

The Ambala business significantly underperformed in FY24 following the death of its founder and sole shareholder in late 2023

Cake Box expects to be able to cross-sell products in both companies’ stores while continuing to open new stores under both brands:

opportunity to cross sell products in both Cake Box and Ambala stores;

c.100 Cake Box stores have been identified which are located in areas where Ambala franchise stores can be located and potentially run by existing Cake Box franchisees

Significant cost savings and synergies are expected, including from modernising production and merging head office and logistics functions.

This seems a logical and complimentary acquisition to me, albeit quite ambitious in scale.

Financials: Cake Box is paying £22m for Ambala, funded through a mix of debt and fresh equity:

• £7m placing (9.72% of existing share count)

• £15m term loan

• “Any balance” from existing corporate cash (net cash was £5.6m at 30 Sept 24)

There’s also a £0.2m retail offer to allow private investors to participate in the fundraising at the placing price of 180p, avoiding dilution. Details are here - the offer closes on 13 March.

Adding the £15m loan to Cake Box’s 30 Sept ‘24 net cash position of £5.6m suggests net bank debt of c.£10m. Given the company’s comments on its existing cash balance, I suspect the true year-end figure may be slightly higher.

I estimate leverage might increase to c.2.0x EBITDA, as a result. I’d see this as manageable, but at the upper end of my comfort zone for a small cap.

A summary of Ambala’s financial performance in FY23 is provided, together with numbers for the 12 months to 31 October 2024:

Using the latest LTM FY24 figures suggests this acquisition is priced at a multiple of 12.4 times trailing EBITDA, or alternatively 14 times pre-tax profit.

This compares with Cake Box’s own valuation of around nine times TTM EBITDA:

Ambala appears to enjoy a low-double digit operating margin, so I don’t think the purchase price is necessarily unreasonable. But Cake Box’s lower valuation means it won’t benefit from the earnings re-rating that can occur when a highly-rated company acquires a smaller company at a lower valuation.

Cake Box trading update: we also have a brief update on Cake Box’s own trading today, ahead of its March year end (my emphasis):

The Company is on track to open more than 25 new stores by the year end and the Board is confident that results for the year ended 31 March 2025 will meet market expectations.

Christmas and New Years’ weeks are said to have surpassed £4m sales, with New Years’ week setting a new weekly record.

Consensus forecasts imply 8.7% revenue growth for FY24, so perhaps H2 was a little stronger than in H1.

Broker estimates price the stock on a FY25 P/E of 15 and a 5% dividend yield. That seems very reasonable to me for a growing, high-margin franchisor:

Roland’s view

Cake Box’s particular USP is egg-free cakes – according to its website, the company’s founders “follow a strict lacto vegetarian diet”. While the cakes are broadly popular, my understanding is that this is an offering that particularly resonates with the UK’s Asian community. As such, today’s acquisition appears logical and consistent with the company’s history and core customer demographic.

Cake Box is acquiring a very well-known brand in the Asian community to which Cake Box can apply its growth experience

I’m always wary about big acquisitions, as they are difficult. Investors need to form their own view on the merits of this deal. I would argue that the risk here lies in the scale of the deal and the potential complexity of integrating the two businesses and reversing the recent decline in Ambala’s profitability.

Given the apparent strong fit between the two businesses, I’m going to give Cake Box the benefit of the doubt and remain broadly positive. But in recognition of the new level of debt and operational risk in the business, I’m going to reduce our previous GREEN view to a slightly more cautious AMBER/GREEN.