Café chain Cofix, which seeks to go public through a merger into stock exchange shell company Agri Invest Ltd. (TASE:AGRI), published a valuation last week from consultants Giza-Singer-Even. Cofix, which was founded less than two years ago and opened its first branch in September 2013, is valued at NIS 91 million.
This is despite the fact that Cofix made an operating loss of NIS 1.3 million in 2014, and had a shareholders' equity deficit of NIS 1.2 million at the end of the year.
Cofix is believed to be seeking a stock exchange listing by the back door, through a merger into a shell company, in order to raise money from the public in the future (probably through a bond offering) to finance the development of its business.
The valuation has to be taken with a pinch of salt, but nevertheless, how did Giza reach such a high valuation for the young café chain?
The shareholders in Agri Invest, whose holdings will be diluted by about 90% by the expected merger, will have to decide whether they believe in the chain's potential and whether to approve the merger in the shareholders' meeting that will be convened at the end of the month.
Cofix is a chain that sells coffee, soft drinks, baked goods, sandwiches and other products at a uniform price of NIS 5 per item. It was founded by a group of entrepreneurs headed by Avi Katz (toy store chain Kfar Sha'ashu'im, Hagshama Fund).
Cofix's business model is based on setting up small branches, 30-40 square meters in size, on busy streets in city centers, and selling them to franchisees.
The chain sets up each branch itself at a cost of about NIS 440,000, and then sells it to a franchisee for NIS 500,000, giving a gross profit of NIS 60,000. Giza estimates that from October this year the profit on selling branches to franchisees will rise to NIS 100,000 per branch, thanks to changes in the franchise contract.
Apart from the one-time profit from selling branches, the chain has two further sources of revenue. It charges franchisees a NIS 5,000 management fee, and new branches will also pay monthly advertising fess of NIS 1,000. Secondly, Cofix sells the franchisee the entire merchandise sold at the branch, after buying it collectively from the suppliers.
According to the figures that the chain provided to Giza, on average 1,800 items are sold per branch daily, giving daily revenue of NIS 9,000 to the franchisee. Altogether, the chain's revenue totaled NIS 51.5 million last year, and its gross profit was NIS 8.4 million, 16% of sales.
The main risk to Cofix is from competition, with rival chains (such as Cofizz) being set up with a similar format, and from developments in prices in the industry as a whole that will reduce the attractiveness of the products sold at the chain's branches. To that must be added an additional significant risk, in the shape of a possible rise in prices of the raw materials, leading to erosion of the chain's profitability, or to a fall in sales because of the need to raise prices. Extreme cases of possible harm to the brand because of revelations and reports in the media are of course another risk that cannot be discounted.
A glance at Cofix's balance sheet reveals that despite the rapid development of branches and the high cost of setting up each one, its net debt amounted to just NIS 2.4 million at the end of the year, and it has no bank loans, but only interest-free owners' loans totaling NIS 3.8 million, due to have been repaid at the end of last March.
Published by Globes [online], Israel business news - www.globes-online.com - on May 12, 2015
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