AIM-quoted Franchise Brands (LON: FRAN) is on track with the integration of on-site hydraulic hose replacement services provider Pirtek and overall trading was positive in third quarter despite some weakness in the summer. Investors appear to have focused on the pre-tax profit forecast downgrade due to higher interest charges and the share price slipped 5.71% to 148.5p.
Underlying trading remains in line with expectations, but the decision not to sell the B2C franchise businesses means that the borrowing remain high. The level of interest rate depends on the level of EBITDA in relation to borrowings. Cash generation will reduce the net debt next year, but it is set to be £79m at the end of 2023.
The B2B services, such as drain clearance and kitchen services, are required by customers and are not directly subject to consumer demand. Additional services are being offered and there is potential for cross-selling.
Allenby forecasts an improvement in pre-tax profit from £12.8m to £20.1m this year. Earnings should rise from 8.4p/share to 8.7p/share despite the larger number of shares in issue. A full contribution from Pirtek and costs savings mean that 2024 pre-tax profit could jump to £27.2m. The shares are trading on 14 times prospective 2024 earnings.
The placing to fund the Pirtek acquisition was at 180p/share and the share price has fallen by one-quarter since the beginning of the year. There may be continued short-term weakness in the share price, but the longer-term potential will eventually be recognised in the price.
