Questor: this franchising firm has bags of ambition and is already profitable. Buy

Metro Plumb van on Westminster Bridge 
Plumbing services specialist Metro Plumb is part of Franchise Brands

Questor share tip: Franchise Brands’ founders are Domino’s Pizza alumni so they know how to make the business work

Franchise Brands is a small company in the early stages of development so it is not suitable for all investors by any means, but risk-tolerant portfolio builders could find it worthy of further research.

The firm owns various franchise companies and earns money from franchisees through start-up charges and monthly income from licence fees and product sales.

The biggest business is drain-unblocker Metro Rod. Plumbing services specialist Metro Plumb, car body repair company ChipsAway and dog-sitter Barking Mad are also part of the core portfolio.

Stephen Hemsley and Nigel Wray founded the firm in 2016 and have a combined stake of more than 50pc. Their work at Domino’s Pizza shows they know the franchise business well and have no shortage of ambition. A limited debt pile leaves plenty of scope for investment to support organic growth and supplement it with select acquisitions.

The plan is to increase sales at Metro Rod alone to £100m over time, which compares with a group total of £35m last year. The firm is already profitable and cash generative; a 43pc increase in the interim dividend in July, albeit from a low base, suggests no shortage of confidence in the future.

Metro Rod is beginning to hit its stride and there is long-term potential here.

Questor says: buy

Ticker: FRAN

Share price at close: 83.5p

Update: Burford
 Capital bonds

It is fair to say that we did not see the assault on Burford Capital from a short-seller, Muddy Waters, coming and its 6.125pc 2024 bonds have taken a pasting.

Burford’s response to Muddy Waters’ commentary on its accounting, financial strength and shareholder structure looked powerful and – even as we greatly respect the track record of Carson Block, the short-seller’s founder – we will hunker down and stick with the bonds. They now offer a yield to maturity of more than 9pc, assuming that they are redeemed in full and on time.

Even if Mr Block’s analysis is correct – and management says it is not – Burford ended its first half with $171m (£141m) in cash, a sum that has since swelled to $400m thanks to the receipt of settlements due from investments. The firm also has access to the equity and debt markets, as well as potential strategic investors. That suggests the coupons on the bonds should be paid.

We intentionally chose Burford’s bonds over its shares for additional protection, and while the lofty yield clearly comes with risks the potential returns appear to offer enough compensation. 

Questor says: hold

Ticker: BUR2

Bond price at close: £85.50

Update: Renold

After a couple of weeks of stewing we have changed our minds and reluctantly decided that it is time to take a “safety-first” attitude with turnaround play Renold.

As discussed last month, an investigation has discovered how operating profit had been overstated by £1.8m over three years, although this represented only 10pc of last year’s operating profit.

However, there is always that nagging fear with investigations into accounting that someone may find more than they bargained for once they start looking – health inspectors rarely find just the one cockroach, after all.

We must stress that there is no indication at all of any further accounting problems at the specialist manufacturer. If none emerge, the stock could look cheap at barely six times earnings, even if there is a risk that a Chinese or global economic slowdown puts a spanner in the works.

Hopefully we can revisit this one once the accounts are settled as there is still scope for an upturn in profits, but for now we will sell.

Questor says: sell

Ticker: RNO

Share price at close: 22.4p

Russ Mould is investment director at AJ Bell, the stockbroker

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.

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