http://boards.fool.co.uk/Message.asp?mid=10336357&post=true gives my reasons for having nominated CFE as my entry in the 2007 PaulyPilot's Pub competition.

It reads as detailed below and is IMHO pretty conservative. Cheers, Martin
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Having had CFE as my entry in the 2006 competition and having now chosen it as my entry in the 2007 competition, I thought I'd better explain why I think its significantly under-priced. Provided below is a brief introduction to CFE, followed by some analysis of the possible cash and P/L impact of the franchise roll-out process which is being very actively pursued.

Worth noting that the analysis excludes what IMHO is the most exciting part of the business, the Co-Branding, in which many potential deals would lead to a step change increase in the total number of outlets & profitability, but still suggests a company that will move to strongly growing profits in the years ahead.

Feedback welcome. Cheers, Martin
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Introduction
Last year, in my comp entry, I stated:

UK:CFE Coffee Republic

I currently have no shares in CFE although I've managed to lose money on them during 2005. CFE are in the relatively early stages of franchising their outlets. If it goes well they will probably multi-bag from the current SP. If not, they could well crash and burn.

Rather a lot has happened since then, including the shareprice more than doubling, with a shareholder group having ejected the waster who was CE, and two major shareholders having become Chairman & Chief Executive. Rather than re-invent the wheel in terms of describing the company's history, its probably better, and certainly easier, to direct you to CockneyRebel's excellent header to the current CFE ADVFN thread, http://www.advfn.com/cmn/fbb/thread.php3?id=13077807&from=1&to=1

Also worth noting that, having got involved in the shareholder action group and bought most of my stake at well below current levels, I'm very close to having a disclosable holding in CFE and therefore may be biased!!

Fundamentals

Share Price (Bid/Mid/Offer) = 2.8p/2.81p/2.82p
Market Cap 14.4M
Shares in Issue 513M
NMS = 75000
Based on current price 02/01/07
Dividend = None
Net Cash Flow = Negative
TBV = Negative
Debt = circa 2.4m
Major Shareholders:
Steven Bartlett (CE), through his 100% owned company, Plymouth Land, 13.65%
Peter Breach (Chairman), through his 100% owned company, Surthurst, 11.67%
The website address is www.coffeerepublic.co.uk
Profitability What's a profit? They've never made one of those... and have over 8m of tax losses that could be utilised going forward...but, under new management, that should change in the 07/08 financial year which commences in March 2007. Indeed the recent interim results, http://www.investegate.co.uk/Article.aspx?id=200612201406243505O from 20-Dec-06, include the statement... no amount is provided for the value of... ...for the value of the tax losses
which amount to around eight million pounds and which we intend to make good use
of before very long.


Analysis

Using the interim results as a template for detailing the various elements of the business, CFE comprises :
(a) Individual Bars
(b) Regional Development Franchises (RDFs)
(c) International Master Franchises (IMFs)
(d) Co-Branding/'Coffee Republic Served Here'

I expect (c) to be both cash flow positive and profitable and (d) to be, at worst, cash flow and profit neutral but, due to a lack of specific data, I am going to ignore them in terms of further analysis here. However, in this context, it is worth noting that:

(c) International Franchising,
The interims detailed that the Bulgaria Master Franchise has been awarded and, given that, as per the Interims, Negotiations are in hand for a number of territories., I expect more International Franchises to be announced in the near future and going forward.

(d) Co-Branding/Coffee Republic Served Here
The interims refer to being in discussions with a number of national retailers with regards to co-branding opportunities. Indeed three co-branding trials will be taking place with a national pub operator in the near future.. My suspicion is that this element of the business could enable CFE to rapidly and profitably expand its number of outlets.

The remaining elements of the business:
(a) Individual Bars, and,
(b) Regional Development Franchises (RDFs),
are much better defined in that many of the associated numbers are in the public domain.

Consequently, in considering the RDFs and the Individual Bars, my assumptions are as follows:

(1) RDFs will, on average, cost franchisees 200k, with 20-25 RDF areas in all, with 5 area-based RDFs having been awarded to date; since these are template agreements I anticipate the costs to the business of setting up an RDF to be fairly minimal, but have assumed costs of 20k per RDF to be on the safe side, giving 180k of pure profit per RDF, with:
- the cash normally receivable up-front and/or in the early part of the agreement
- the associated profit to be amortised over the duration of the RDF agreement, which I understand to be 20 years

(2) Based on I anticipate we will grant RDFs covering substantially the whole of the British Isles before the end of the next financial year. from the interims, I'll assume the roll-out of the remaining 15-20 RDF areas will be completed in Mar-08. This may be a tad optimistic but my impression is that the Chairman, Peter Breach, is a very conservative individual, so I'm prepared to be marginally more bullish, especially as we've seen 4 RDFs awarded in the 9 weeks since the new management team have been in post; these 4 RDFs included the non-standard FEC RDF detailed in http://www.investegate.co.uk/Article.aspx?id=200611100700038619L.

(3) Based on (1) and (2), overall I'll assume 17 further RDFs by Mar-07 with average net receivables of 180k each, with each RDF to be paid for in-full over the first two years of the franchising agreement. So, across all the 17 RDFs I've assumed, that means net up-front fee income to CFE of 3.06m, with the associated profit to be amortised over the 20 year period of each RDF.

(4) The company currently has 42 outlets. The interims state, During the half year nine existing bars were franchised and subsequent to the half year end we have franchised a further four existing bars bringing the total to eighteen. I am pleased to report that subsequent to the change in management there has been a significant strengthening in the pipeline of prospective franchisees including a strong demand for new sites both direct to the Company and through our Regional Development Franchisees. Given that the company is retaining three sites, one as a trial site and the two outlets at London Heathrow, where franchising is not allowed, I'm going to assume the remaining 21 existing outlets are franchised at a rate of two per month for 11 months. Again this may be marginally optimistic but I've been very pessimistic elsewhere.

(5) On the existing outlets, the standard 17.5k franchise fee is payable together with a business transfer fee which has been widely quoted on bulletin boards as being in the range 80k - 200k. However, the figures provided in the interim results suggest that either CFE has focused on disposing of loss-making/low-profit outlets first or that, when considering what an average transfer fee might be, the top end of the 80k-200k range is rather optimistic. Consequently, I'm going to assume an average business transfer fee across the remaining 21 outlets of 90k, a franchise fee of 17.5k and costs to CFE associated with each transfer of 7.5k. This would mean on average, in cash terms, that the franchise of a existing outlet leads to CFE receiving 100k in up-front fees. So, across, all 21 outlets remaining to be franchised, net up-front fees totalling 2.1 million could be anticipated. I do not have a clear picture of the likely profit/loss impact of franchising these outlets; however each individual profit or loss will be an exceptional item that will impact TBV (tangible book value) but will not impact cash flow.

(5) Once an existing outlet is franchised, an ongoing franchise fee of 7.5% of sales is payable to CFE. Assuming an average outlet takes 6k per week, or say 300k per annum, this is 22.5k per annum of fees payable to CFE. One nice positive here is that the marginal cost to head office of supporting an additional outlet is minimal, so that this 22.5k is virtually pure profit/'contribution to head office costs'. On top of this, no doubt CFE are making a small margin on the supply chain into the outlet. Let us say this is 2% of sales, meaning another 6k per annum to CFE. So, once we get to 39 franchised outlets, that would be 39 x (22.5k + 6k) = 39 x28.5k = 1.111 million per annum towards profit/'the cost of head office' all of which will come through as cash flow.

(6) However, this is not the whole story with respect to individual outlets. Specifically, the interims state that, With the new management and business generation processes being established I expect that, over the next year, the domestic portfolio will almost double in size and overseas Coffee Republic outlets will be starting to trade. So, in a year's time, one could reasonably assume there will be another 38 (say) franchised outlets in the UK. Some of these outlets will be direct to the company and the rest through the RDFs. In financial terms, CFE gains most from franchised outlets where the RDF is not involved, on which it gains all the franchise income, so I'll assume all these 38 outlets are via RDFs

(7) The initial franchise fee on an individual outlet is 17.5k. If its through an RDF, this fee is split 50:50 between the RDF and CFE. Given that the RDF does most of the associated work, I'm going to assume CFE's associated costs are minimal and that they make 8k profit from this. The associated cash flows are up-front so that's 38 x 8k = 304k of cash to CFE over the course of the year. The associated profit will be amortised over the duration of the franchise agreement, which I suspect will be viewed as 5 years as, although the agreement is normally for 10 years, a further franchise fee is payable after 5 years..

(8) From a franchisee's point of view, the fees payable are unaffected by whether or not an RDF is involved, meaning that 7.5% of sales are payable in franchise fees. Where this is through an RDF, the RDF receives 40% of this fee and CFE the remaining 60%, i.e. 4.5% of sales. Using the 300k per annum turnover number assumed above, this is 13.5k of virtually pure profit/'contribution to head office costs'. On top of this we have the profit on the supply chain into the outlet, which at 2% of sales would be another 6k per annum to CFE. So that's a total of 19.5k marginal profit per outlet. So, once we get to 38 franchised outlets via RDFs, that would be 38 x 19.5k = 741k per annum towards profit/'the cost of head office'. Given that none of these outlets is currently open, so that on average across the year, 19 will be open, and it will take time to ramp up sales, in year 1, it might be safer to assume that, rather than 741k, the franchise income would be a quarter of that, say 185k, ramping up to 2/3 of the 741k, say 494k, in year 2 and 741k in year 3

(9) Looking further forward, and given that each RDF is, in principal, meant to be opening 5 new outlets per year for the first 5 years of the RDF agreement, I think its reasonable to assume that, if CFE achieves 38 new domestic outlets in the next year, it would achieve a minimum of 60 new domestic outlets, more probably 80, in the subsequent year, and at least 100 new domestic outlets in the year following that. To be on the safe side, I've assumed 60 outlets in what I've called year 2.

Profitability and Cash Flow
So what does all this mean in terms of profitability and cash flow?

Well, before we get on to that, the one fundamental piece of information that is missing is head-office costs? Given that note 21 to the 2006 accounts identifies that 20 people were involved in Administration, including the directors, I am struggling to believe that Head Office costs, including what was historically circa 300k for the directors, is more than 1.5m per annum, especially as the Head Office is sited in a fairly unattractive location. I will try to learn more about head-office costs from the company, at the latest at the EGM on 8th February, but the figures below suggest to me that I'm not too far out

Anyway, back to profitability and cash flow, first of all cash flow.

Year 1 (2007)
Building on the assumptions above, the cash flow over the next year would be:

+3.06m Initial fees from 17 RDF agreements (see (1)-(3) above), albeit some of this may be deferred into the following year
+2.10m Initial fees (see (4) above) associated with franchising out 21 of the remaining 24 company-owned outlets
+1.11m Franchise income (see (5) above) on 39 franchised outlets direct to CFE
+0.10m Conservative estimate of combined profit of 3 outlets retained as company-owned
+0.30m Initial fees (see (6)-(7) above) on 38 additional franchised outlets via RDFs
+0.18m Year 1 franchise income (see (8) above) on 38 additional franchised outlets, via RDFs, opened in the year
-1.50m Head Office costs
-0.25m Bank interest and charges based on experience in the 2005/06 tax year
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+5.09m
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Profit would be rather lower and could well still be slightly negative:

+0.15 The 3.06m detailed above, amortised over 20 years
+0.00 A conservative view on the profitability on the transfer fees and franchise fees from franchising out 21 of the remaining 24 company-owned outlets
+1.11m Franchise income (see (5) above) on 39 franchised outlets direct to CFE
+0.10m Conservative estimate of combined profit of 3 outlets retained as company-owned
+0.06m Initial fees (see (6)-(7) above) on 38 additional franchised outlets via RDFs, amortised over 5 years
+0.18m Year 1 franchise income (see (8) above) on 38 additional franchised outlets, via RDFs, opened in the year
-1.50m Head Office costs
-0.25m Bank interest and charges based on experience in the 2005/06 tax year
-----------
-0.15m
-----------

I suspect this number is at the low-end of the likely outcomes, but it is perhaps more instructive to look at the numbers in year 2, and to reflect on the fact that two strands of the business are being completely ignored.

Year 2 (2008)
So, the cash flow in year 2 would be:

+1.11m Franchise income on 39 franchised outlets direct to CFE
+0.10m Conservative estimate of combined profit of 3 outlets retained as company-owned
+0.49m Year 2 franchise income (see (8) above) on 38 franchised outlets, via RDFs, opened in year 1
+0.48m Initial fees (see (6)-(9) above) on 60 additional franchised outlets via RDFs opened in year 2.
+0.29m Year 2 franchise income (see (8) above) on 60 franchised outlets, via RDFs, opened in year 2
-1.50m Head Office costs
-0.10m Bank interest and charges assuming some of the strong cash flow in year 1 is used to significantly reduce the debt.
-----------
+0.87m
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The company would also move into profitability in year 2:

+0.15 The 3.06m detailed above, amortised over 20 years
+1.11m Franchise income (see (5) above) on 39 franchised outlets direct to CFE
+0.10m Conservative estimate of combined profit of 3 outlets retained as company-owned
+0.06m Initial fees (see (6)-(7) above) on 38 additional franchised outlets via RDFs, amortised over 5 years
+0.49m Year 2 franchise income (see (8) above) on 38 additional franchised outlets, via RDFs, opened in year 1
+0.10m Initial fees (see (6)-(9) above) on 60 additional franchised outlets via RDFs opened in year 2, amortised over 5 years
+0.29m Year 2 franchise income (see (8) above) on 60 franchised outlets, via RDFs, opened in year 2
-1.50m Head Office costs
-0.10m Bank interest and charges
-----------
+0.70m
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It is from this point that the effect of the franchising starts to have a more and more significant effect, with profit more than doubling the following year... ...and worth remembering that all the above analysis is ignoring two rather important strands of the business where I'm expecting to see a string of positive RNSes in the coming months.

Is this the Coffee Republic thread???

No it's the CFE Kindergarden.
UC.

David10B have you been given your rattle yet in exchange for the dummie you threw away?

YEP AND ITS LOOKS LIKE I PUT IT TO GOOD USE AS I AM USING IT TO RATTLE THE RAMPERS

You're not rattling me David, I'm just having good fun during the summer doldrums awaiting sustained share action in an upwards direction. I've a feeling we're going to have to wait a few months yet though!
UC.

You will not see any upward action on this one my friend, put your money into MLR or CFE if you want a fliers.

COH IS DEAD IN THE WATER

I think you're on the wrong thread. This IS the CFE thread.
UC.

I know I have been trying to tell them that, seems they like CFE better.

More dilution! that's why the SP has been drifting lower. Just hope 1 for 10 consolidation doesn't come next.
UC.

3 outlets in Turkey due to open in July and the Turkish franchise operator reported strong demand from new franchisees wanting to open in all the popular resorts so cfe are moving fast to satisfy demand. all very good news as there are new openings in the uk pipeline as well---scotland here we come!! I just hope they aren't expanding too quickly and trip up.

bit of a bummer today in the news eh Chaps?

May now even fall back to the issue price of 2.5p as CFE needs a lot of funds.

However a short term disaster, long term onwards and upwards.

I have no problem holding this one.

COH appears to be blue again...LOLOLOLOL

Anyone slightly concerned about the RNS, discounted issue again... PI's not invited to join... Do you think the sp will slide back to issue price of 2.5p...

It is, as stated a bit of a bummer, and it could well drop back under the current circumstances.

But that the share game for you no need to get all bitter and twisted as you can clearly see I take these things as they come and not child like as its a BIG BOY'S game.

Tenby

So you are not bitter and twisted over your loss with BKE...LOL.

Please dont be silly, how could I be never owned them

Oh yes you did...you little fibber.

Well stop gobbing and lets see the facts on the table please.

jim_Bentley Davis

Do you think BKE will reach 1 or do you think it will stay below 1P...

A small dilution to raise a small amount, if they think they need it so be it positive talk as always, anticipated growth in international franchising.

Still holding long term.

My concern about the RNS is the quote about needing to build the back room/support staff... They are raising cash to increase the headcount... A little worrying you would have thought they might be able to do this with the increase in profit...