Sunday share tips: Kier, Cake Box

Kier needs to be more transparent about its debt, says the Sunday Times' Inside the City column. While revenues and profits have been slowly growing, since the start of 2017 its shares have fallen from around £14 to below £10, with an expanding group of short-sellers resulting in close to 11% of its shares being sold short at the end of June. Analysts at Barclays recently drew attention to Kier's byzantine balance sheet, noting the “relatively unknown level of off-balance sheet leverage”.

Net debt has more than doubled in two years to £239m by the end of 2017, though Kier insisting that this was easily serviceable at less than one times net underlying earnings, and is due to shrink as more profits come. A more accurate reflection of the reality in the construction business might be to use average net debt, the column suggests, which was £350m out of a four-year core revolving credit facility of £670m. On top of that is a £150-170m liability from the supply chain finance scheme and another £200m owed by its construction joint ventures classed as off-balance sheet.

On the plus side, Kier has an order book of £9.5bn and their debts are backed by assets, meaning lenders cannot chase Kier itself for the money. Risk is spread too: it has about 500 projects with an average value of £5m to £7m. No specific buy or sell recommendation was given.

Cake Box was tipped as a 'buy' by Midas in the Mail on Sunday. The cake retailer, which was set up by a chef whose family could not eat cakes containing eggs, now has 91 franchise stores from Scotland to the South Coast and floated on the London Stock Market's junior market last week. More than 50 franchise applications are received per month as the company hope to hit 250 stores over the next two to three years. Selected new franchisees are charged an upfront fee in return for a store fit-out, training, ongoing support and a weekly supply of sponge cakes, fresh cream, jam and chocolate sprinkles.

As well as egg-free cakes, the company also specialises in personalised celebration cakes, for birthdays and other key life events. Of the 22,000-plus cakes sold every week, at prices ranging from £18.99 to wedding extravaganzas costing £250 or more, most of sales come from personalised cakes. Around 90% of customers have no dietary restrictions. Sales of £12.8m in the year to March 2018m were up 47% from the year before thanks to new store openings and an increase in sales per store, while profit before tax increased 73% to £3.3m.

The founders have retained a 50.1% stake in the shares and have pledged to adopt a progressive dividend policy. Franchisees have also been awarded shares to align their interests with investors.