Lunch At Myhome*

Earlier this week I found myself having lunch squeezed between Russell O’Connell and Jonathan Jenkins in a venue just on the edge of the City. Russell O’Connell is the CEO and founder of Ofex-listed MyHome International and a director of Franchise Investment Strategies, also listed on Ofex, whilst Jon Jenkins, the former managing director of Ofex until November 2004, is also a director of Franchise Investment Strategies. It might have been more apt if we had ordered a takeaway meal from Domino’s Pizza (DOM: AIM), one of the country’s most successful franchise businesses, but the cuisine on offer was first class.

I recall taking a look at the promotion material from MyHome when it changed its name from Chores Group in March 2004. Initially I was very sceptical of the business model, which is signing up franchise partners to provide cleaning services to homes. I was unsure how many people in this day and age would be willing to pay for a stranger to come into their home and clean it. My scepticism though has proved unwarranted and the enthusiasm and confidence that Russell O’Connell has in his business and its future has been evident on the two occasions that I have met him over the past two months.

I put the idea to Russell that for home owners to be willing to pay for someone to clean their home, the success to the business must be in finding the right price that people are willing to pay. It turns out that Myhome prides itself on the quality of service that if offers, as opposed to offering low prices to attract business. In the UK there are around 2.7 million homes that spend £11 billion each year on domestic help, making the residential cleaning market one of the fastest growing market sectors in the country. The sort of numbers being bandies about by Russell show that in new as well as older franchises punters are prepared to pay a premium rate for a quality and reliable branded cleaning service. Most newer franchises are trading ahead of budget.

Before long conversation turned to the share price, which at 13.875p giving a market capitalisation of £3.37 million, doesn’t appear to reflect the rapid progress the company has made. Russell agreed, but explained that the shares have risen 125% over the past year from a close of 6.12p on 17^th September 2004, to their current 13.875p. Ideally Russell would like to see the shares trading at around 25p, but over time, providing the company keeps performing as it is at present, the shares will be re-rated to that price. One fact that Russell is clearly proud of is that Myhome is the most heavily traded company on Ofex.

One question that I’ve put to Russell on the past two occasions that I’ve spoken with him is if the company has any intention of moving from Ofex onto AIM. Russell is a big fan of Ofex, and for the foreseeable future it would appear the correct exchange for the company to remain on. It would have no benefit for the company if it moved to AIM where there over 1200 companies listed.

Now that Myhome is recognised as being one of the UK’s most successful franchise businesses, Russell O’Connell is deservedly seen as being a guru on the franchise industry. Increasingly over recent months Russell has been featured in franchise-industry magazines, which has led to him receiving enquiries on franchises outside the realm of Myhome. This led Russell to found Franchise Investment Strategies (“FIS”), which shares directors with Myhome. Arif Virani is the finance director of FIS and a non-exec of Myhome, Simon McNeil-Ritchie is the managing director of FIS and the chairman of Myhome, whilst Russell O’Connell is a director of FIS and the ceo of Myhome. I feel that Jon Jenkins, who is a director of FIS, is a strong asset for the company.

Russell and Jon explained that FIS has been set up to invest in profitable, established franchise companies, which can utilise the equity to grow the business. The directors of FIS will also provide investee companies with strategic advice on enhancing their business. The likely exit point for FIS will be when the investee company floats on Ofex or another exchange. FIS, which at 5.25p is capitalised at £1.91 million, has to date made one investment since it came to market on 18^th August 2005. It was announced on 26^th August that FIS had acquired 50% of DTT Group Ltd for £100,000. DTT is a national franchise business, which provides training for drivers of large vehicles, and whose clients include Shell, Manpower, Travis Perkins, and the armed forces. Russell intimated that the company hopes to bring DTT to Ofex in the next year.

Myhome holds 10 million shares, 27.42%, in FIS, which are worth £525,000. Russell holds 4 million shares, 10.96%, of FIS, whilst Jon holds 1 million shares, 2.74%. Both companies have their attractions, but Myhome shares, which were recommended on Watshot earlier this year at 15p, continue to look very cheap. Equity Development, a commissioned research boutique, has forecast Myhome’s earnings for 2005 to be 0.59p per share, rising to 4.5p per share in 2006. Myhome shares are therefore trading on a prospective 2006 PE of 3, which is too low for a business growing so rapidly. In 2004 Seymour Pierce wrote that “a successfully run franchise operation should command an above average rating, since much of the operational risk is removed and the return on capital is high. In effect, the principle target for investment is in marketing and customer acquisition costs… This enables a very high return on capital.” I would rate Myhome shares as being a strong buy.

Finally, to finish off my maiden lunch report I would like to share a rumour with readers. I am expecting Myhome to announce an acquisition later this year, which could see it offering additional home services, rather than just cleaning.

*Myhome is a corporate client of both GE&CR and Bishopsgate Communications which are owned by RSH, the ultimate owner of this website. FIS is also a corporate client of GE&CR.