Cooks Global Foods. Funded for growth. Growth plans. Interim results. Valuation: Upside in valuation. Interim results.

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1 Cooks Global Foods Funded for growth Interim results Food & beverages Cooks Global Foods (CGF) has reported a net loss excluding impairment charges of NZ$1.556m for H116, a 31.7% increase year-on-year. The company is very much in the investment phase of scaling up its operations offshore and has set in place the parameters to fund its growth plan for the next few years. Our DCF-valuation of NZ$0.245 per share post-transaction is based on the company successfully rolling out 710 stores by FY21. Year end Revenue (NZ$m) PBT* (NZ$m) EPS* (c) 03/ (4.0) (1.65) 0.0 N/A N/A 03/ (4.0) (1.40) 0.0 N/A N/A 03/16e 9.4 (3.6) (0.74) 0.0 N/A N/A 03/17e 13.8 (0.8) (0.14) 0.0 N/A N/A Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. DPS (c) P/E (x) Yield (%) 18 December 2015 Price NZ$0.13 Market cap NZ$44m Net debt (NZ$m) at 30 September Shares in issue 338.4m Free float ~11% Code CGF Primary exchange NZX Secondary exchange N/A Share price performance Growth plans CGF s business plan is to significantly grow its Esquires Coffee House franchise business from the current 85 stores into a major international brand across Europe, the Middle East, Asia and North America. The company expects to have 710 stores (all franchised) by FY21, from which it will earn royalties paid by franchisees, revenue from the sale of master franchises and sales from coffee and other products to the franchises. To fund this roll-out, the company has secured approval from its shareholders to allow a NZ$9.0m capital injection by interests associated with the chairman Keith Jackson and a key Chinese partner Jiajiayue Group, and this transaction is expected to complete shortly. Shareholders have also approved a NZ$9.0m capital raise, likely to be in the form of a public share offer in Interim results The company reported an H116 net loss excluding impairment charges of NZ$1.556m, an increase of 31.7% y-o-y, on the back of a 4.1% y-o-y increase in sales to NZ$4.513m. Gross margin for the period increased to 70.4% from 69.9% previously, demonstrating the benefit of updating its UK stores and increased product sales to the stores in the group. Recurring revenue as a proportion of total revenue expanded to 82% for the period from 77.5% y-o-y. Valuation: Upside in valuation Our DCF valuation (post-transaction) is NZ$0.245/share, 88% above the current share price. The valuation is based on a WACC of 10.7% and a terminal growth rate of 2.0%. It is also predicated on CGF achieving its goal of rolling out 710 stores by FY21. In the near term, the share price may experience headwinds as the company completes the NZ$9.0m capital raise approved by shareholders and slated for % 1m 3m 12m Abs Rel (local) 6.6 (1.3) (5.5) 52-week high/low NZ$0.16 NZ$0.11 Business description Cooks Global Foods owns the global rights to the Esquires Coffee House brand with 85 stores currently operating in the UK, Ireland, China and the Middle East under franchises and companyowned stores. It is planning significant expansion in store numbers over the next five years. Next events Full year results June 2016 Analysts Finola Burke +61 (2) Moira Daw +61 (2) consumer@edisongroup.com Edison profile page

2 Interim results behind the numbers CGF reported an increased interim net loss (excluding impairment charges) of NZ$1.556m, compared with H115 net loss of NZ$1.178m. The 31.7% increase reflected the company s ongoing investment in growth, and higher interest costs and depreciation and amortisation charges. The NZ$0.4m impairment charge related to the UK and Irish operations. Operating cash flows showed a net outflow of NZ$1.36m, up from NZ0.96m a year before, reflecting the consolidation of the China operation acquired in December 2014 and not in the previous period. Revenues grew by 4.1% and gross profit by 4.9%, resulting in a small increase in the gross profit margin to 70.4%, as shown in Exhibit 1. The H116 loss per share increased by 4.5%, reflecting the higher number of shares in issue at 30 September Exhibit 1: Interim results (in NZ$m) H115 H116 % change Revenue Gross profit Gross profit margin 69.9% 70.4% 0.8 Net loss (before impairment charge) (1.18) (1.55) 31.7 EPS (c) (0.44) (0.46) 4.5 Source: Cooks Global Foods interim results The increase in revenue and gross profit was driven by the franchises in Ireland, which almost doubled revenues to NZ$0.43m and produced a NZ$0.17m turnaround in profit to NZ$0.08m, and by the NZ$0.34m contribution from China. Company product sales from the Scarborough Fair and Progressive Processors businesses increased 9% y-o-y with only a small increase in operating losses. This offset a decline in revenues from the UK operations, which also reduced its operating loss by almost 29% to NZ$0.42m, as shown in Exhibit 2. Exhibit 2: Divisional results (in NZ$m) Global franchising & Design UK franchising & retail Ireland franchising & retail China franchising & retail Supply Corporate Revenue % change y-o-y (4) (23) 96 N/A 9 N/A Operating profit/(loss) (0.417) 0.08 (0.306) (0.14) (1.191) % change y-o-y (32.4) (28.7) (188.9) N/A Source: Cooks Global Foods interim results In the revenue total, the company noted that one-off franchise fees declined 42.2% y-o-y, reflecting timing differences in the sale of regional master franchises, a renewed focus on growing the company-owned stores in the countries in which it already operates and a narrowing of focus on strategic target markets rather than spreading the company s resources too thin across too many markets at this early stage in its life. This was particularly evident in the UK results, which saw a decline in retail revenues due to the sale of company stores to independent franchise operators. The franchisees then contribute to other streams of Cooks such as product and merchandise sales and royalty fees, both of which increase respectively 19.7% and 53.4% y-o-y. This has enabled the company to increase the proportion of its recurring revenue streams in H116 to 82%, from 77.5% y-o-y, as shown in Exhibits 3 and 4. Esquires recurring streams include coffee sales and branded product sales, royalty, retail sales and design fees, while non-recurring streams include master franchise and store opening fees, both of which are irregular and variable in nature. Cooks Global Foods 18 December

3 Exhibit 3: Esquires Coffee recurring/non-recurring revenue split for H116 Exhibit 4: Esquires Coffee recurring/non-recurring revenue split for H115 Non-recurring 18% Non-recurring 23% Source: Cooks Global Foods Recurring 82% Source: Cooks Global Foods Recurring 77% The company ended the six months to 30 September with net external debt of NZ$4.442m, including NZ$1.37m in cash, a NZ$1.8m bank overdraft, NZ$0.5m in NZ bank borrowings, and NZ$3m denominated in the remnimbi. The company advises that around half the Chinese debt is due to be converted to shares within the next month.. Capital reconstruction and capital-raising In November, shareholders approved the sale of DSL Management s 40.29% stake in the company and the issue of NZ$9m in new shares and authorised a further NZ$9m capital-raising to take place in As a result of these approvals, China s Jiajiayue Group (JJY) will acquire 50% of DSL s stake and invest another NZ$4.5m in new capital, while Cooks Investment Holdings (CIH), a vehicle associated with the company s chairman Keith Jackson and other strategic investors, will acquire the other 50% DSL stake and inject NZ$4.5m in new capital. JJY linked its investment in CGF with the condition that it secures approval from New Zealand's Overseas Investment Office (OIO) to acquire a 600 hectare beef and sheep property near Port Waikato. This approval was granted by the OIO on 20 November The transaction is now only waiting on Chinese government approval for JJY to remit funds to New Zealand. Shareholders also approved the raising of new capital up to NZ$9m. The company expects to launch a public share offer in Earnings adjustments We have adjusted our earnings forecasts for FY16-18 to reflect timing of new store roll-outs and higher interest and depreciation charges. At 30 September, CGF had 79 Esquires stores in operation, up from 66 y-o-y, but below our expectations for 82 at the end of the period. We note that the company now has 85 stores in operation. We have also incorporated the new shares to be issued to JJY and CIH and the cash consideration paid for the shares. This, together with our earnings adjustments has resulted in an increase in the forecast loss per share in FY16 and FY17 but a small upgrade in FY18 EPS, and a small reduction in the forecast gross profit for each year, as shown in Exhibit 5. Cooks Global Foods 18 December

4 Exhibit 5: Earnings adjustments EPS (c) Gross profit (NZ$m) EBITDA (NZ$m) Old New % chg. Old New % chg. Old New % chg. 2016e % % % 2017e % % % 2018e % % % Source: Edison Investment Research We have provided more detail in Exhibit 6, which demonstrates the reduction in our revenue forecasts and margin expectations for the company. Exhibit 6: Detailed earnings adjustments FY16-18e NZ$000s FY16 old FY16 new % change FY17 old FY17 new % change FY18 old FY18 new % change Revenue % % % Gross Profit % % % Gross profit 75% 73.0% -2.7% 77% 76.8% -0.4% 79% 78.4% -0.3% margin EBITDA % % % Net loss % % % EPS % % % Source: Edison Investment Research Peer comparison and valuation We use DCF methodology to value CGF, but it is useful to consider the peer valuation metrics for branded coffee houses. Using the 12-month forward consensus forecasts for its peers and our FY18 forecasts (to get a meaningful comparison), CGF is trading at a premium on an EV/EBITDA and P/E basis, reflecting its less mature business model and stronger growth expectations (see Exhibit 7). However, it is worth noting that acquisitions in the sector have been at the upper end of EV/EBITDA multiples. Luxembourg-based, privately held JAB Holdings announced on 7 December it would acquire the largest US coffee roaster, Keurig Green Mountain for US$13.9bn. This was at a 78% premium to the company s last traded price and equated to a 12 months trailing EV/EBITDA multiple of 13.8x. In 2012, JAB acquired Peet s Coffee & Tea, a San Francisco-based, established coffee house group for US$974m, which implied an estimated EV/EBITDA multiple of 21x. 1 JAB has also been mopping up some of the smaller coffee groups in the US, using Peet s to acquire the 10-store, speciality coffee roaster group Stumphouse Roasters in early October 2015 and a stake in the 10- store Intelligentsia Coffee Group in late October 2015 for undisclosed sums. This activity all points to consolidation in the sector and validates Cooks Global s focus on growing its footprint as quickly as possible through both organic growth and acquisitions. 1 Reuters: Cooks Global Foods 18 December

5 Exhibit 7: Peer comparison (prospective 12-month forward) Company Currency Price Market cap (local m) Market cap (US$m) P/E (x) EV/EBITDA (x) EBITDA margin (%) Operating margin (%) Cooks Global Foods (FY18e) NZ$ Starbucks Corp US$ ,840 90, Dunkin' Brands Group US$ ,929 3, Restaurant Brands International US$ ,210 16, Retail Food Group A$ BurgerFuel Worldwide* NZ$ NM NM Café de Coral Holdings HKD ,053 1, Whitbread ,912 12, Minor International THB ,986 4, Gourmet Master Co US$ ,764 30, President Chain Store US$ , , Coffee House companies Median Source: Bloomberg, Thomson Reuters,Edison Investment Research. Note: Prices as at 10 December * 12 months trailing FY15 Our DCF valuation of CGF is NZ$0.245 per share, using the post-transaction share count of m shares and after incorporating the cash from the transaction. This is derived using a WACC of 10.7% and a 2.0% terminal growth rate. As Exhibit 8 below demonstrates, a higher WACC of 11.7% and no terminal growth rate still derives a valuation above the current share price. Exhibit 8: Valuation matrix based on WACC and terminal value (in NZ$) WACC 9.7% 10.2% 10.7% 11.2% 11.7% 0.0% % % % % % % % % Source: Edison Investment Research Cooks Global Foods 18 December

6 Exhibit 9: Financial summary Year-end March NZ$'000s e 2017e 2018e IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 4,488 9,202 9,436 13,831 18,576 Cost of Sales (1,779) (2,856) (2,545) (3,210) (4,013) Gross Profit 2,709 6,346 6,891 10,620 14,563 EBITDA (3,773) (3,345) (2,803) (117) 2,774 Operating Profit (before amort. and except.) (3,944) (3,690) (3,944) (3,772) (3,375) Intangible Amortisation Exceptionals (1,055) (430) (44) 0 0 Other Operating Profit (4,999) (4,202) (3,419) (674) 2,110 Net Interest (86) (217) (259) (129) 517 Profit Before Tax (norm) (4,030) (3,989) (3,634) (803) 2,627 Profit Before Tax (FRS 3) (5,085) (4,408) (3,678) (803) 2,627 Tax 0 0 1, (736) Profit After Tax (norm) (4,030) (3,989) (2,617) (578) 1,892 Profit After Tax (FRS 3) (5,085) (4,408) (2,661) (578) 1,892 Average Number of Shares Outstanding (m) EPS - normalised (c) (1.65) (1.40) (0.74) (0.14) 0.46 EPS - normalised fully diluted (c) (1.65) (1.40) (0.74) (0.14) 0.46 EPS - IFRS (c) (2.08) (1.55) (0.75) (0.14) 0.46 Dividend per share (c) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets 5,256 11,563 13,480 14,021 14,539 Intangible Assets 4,006 10,429 10,429 10,429 10,429 Tangible Assets 945 1,134 3,051 3,592 4,110 Investments Current Assets 3,655 9,010 14,671 6,787 9,727 Stocks 298 1,013 1,070 1,569 2,107 Debtors 567 1,255 1,326 1,944 2,610 Cash 1,683 4,710 9, ,736 Other 1,107 2,032 3,274 3,274 3,274 Current Liabilities (6,515) (11,368) (12,367) (5,826) (7,394) Creditors (2,082) (2,968) (10,337) (11,788) (13,356) Short term borrowings (4,433) (8,400) (2,030) 5,962 5,962 Long Term Liabilities (1,420) (810) (810) (810) (810) Long term borrowings (1,420) (810) (810) (810) (810) Other long term liabilities Net Assets 976 8,395 14,974 14,171 16,063 CASH FLOW Operating Cash Flow (2,475) (4,081) (2,808) 219 3,137 Net Interest (86) (174) (259) (129) 517 Tax (incl GST) (736) Capex (net of disposals) (447) (260) (2,519) (1,098) (1,183) Acquisitions/disposals (2,127) (2,210) Financing 5,169 9,933 9, Dividends Net Cash Flow 34 3,208 3,458 (1,008) 1,736 Opening net debt/(cash) (259) (293) (3,512) (6,970) (5,962) HP finance leases initiated Net related party advances/(repayments) Closing net debt/(cash) (293) (3,512) (6,970) (5,962) (7,698) Source: Company accounts, Edison Investment Research Cooks Global Foods 18 December

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