Company Overview: Freedom Foods Group Limited is engaged in sourcing, manufacturing, sale, marketing and distribution of cereal and snacks; sourcing, manufacturing, selling, marketing and distributing plant and dairy based beverages; selling, marketing and distributing canned seafood, and investment in dairy farming operations. The Company operates through five segments: Freedom Foods, which includes cereal, snacks and branded plant-based beverages; Pactum, which offers a range of ultra-high temperature processing (UHT) food and beverage products, including liquid stocks, soy, rice, almond and dairy milk beverages; Pactum Dairy Group, which offers a range of UHT dairy milk beverage products; Specialty Seafood, which offers a range of canned seafood, such as sardines, salmon and specialty seafood, and Freedom Foods North America, which offers a range of products for consumers, including allergen free, low sugar, or salt, or fortified or functional.
 

FNP Details

Decent Results Posted in 1H FY19: Freedom Foods Group Limited (ASX: FNP) is a small-cap food and beverages company with the market capitalisation of circa $1.11 bn as of 20 August 2019. It is primarily engaged in the sourcing, manufacturing, selling, marketing and distribution of plant and dairy-based food products and beverages. The company earlier released its results for the half-year ended December 2018 in which it posted an improved financial performance coupled with higher sales revenue and earnings. The company stated that the deployment towards innovation, brand, and market development assisted in growth in the key business divisions and markets. The company posted net sales revenue amounting to $209 million, which reflects a rise of 31% on the previous corresponding period. FNP’s gross margin witnessed a rise of $14.5 million and stood at $51.7 million and its operating EBDITA increased 31.2% and stood at $21 million. The company’s results for 1H FY19 reflected increased sales and earnings contributions from Dairy Beverage, Nutritionals and Plant Beverage business units, which were offset by the reductions in Cereals & Snacks and Specialty Seafood.

With respect to capital expenditure, the company added that it happens to be one of Australia’s leading investors in the state-of-the-art food and beverage manufacturing capability, and in 1H, it invested over $80 million in the plant and equipment. Additionally, the company stated that the capital expenditure program gives a strong operational platform to significantly increase sales and operating financial returns over the upcoming period. The ongoing operational capital expenditure through FY19 would be relating to the completion of key upgrades at Shepparton for UHT and installation of Lactoferrin capabilities. With respect to liquidity and financing facilities, the company added that it held cash of $9.7 million as at December 31, 2018, and its total borrowings amounted to $173.7 million, which comprises term facilities, equipment finance leases and working capital facilities. The company was having net debt amounting to $164.0 million and was having a net debt to equity ratio of 30.8% as at December 31, 2018, and this is below the prior corresponding period.

The company has made deployments toward people and capability in order to ensure that it can implement and manage growth. Additionally, the decent capabilities to generate revenues and operational capabilities might act as tailwinds for the overall growth moving forward.
 

Key Financials (Source: Company Reports)

Top 10 Shareholders: The following table gives a broader overview of the top 10 shareholders of Freedom Foods Group Limited:

Top 10 Shareholders (Source: Thomson Reuters)

Reduction in Long-term Debt Might Support FNP: The company has a decent position in its key margins in 1H FY19 as its net margin stood at 1.8% and its EBITDA margin was 7.3%. The company’s percentage of long-term debt to total capital stood at 15.2% in 1H FY19 which reflects a fall of 10.4% on a YoY basis and, thus, it looks like that the company has reduced its exposure towards the long-term debt. Generally, a fall in the long-term debt is considered as positive as it reduces the long-term commitments of the company.


Key Metrics (Source: Thomson Reuters)

Announcement of Completion of Institutional Entitlement Offer and Placement: Freedom Foods Group Limited has made an announcement about the successful completion of the institutional component of $130 million equity raising. The company stated that institutional portion of pro-rata accelerated non-renounceable entitlement offer and institutional placement both garnered around $119.3 million, involving an offer price of $4.80 per new fully paid ordinary share issued. The key personnel of the company stated that the placement was significantly oversubscribed, and there was robust demand from the broad range of high-quality institutional investors. It was further added that the institutional entitlement offer was well supported by the existing institutional shareholders with the take-up of around 92%. The following picture is a development curve extracted from the equity raising presentation:


Development Curve (Source: Company Reports)

In the same release, it was added that the funds garnered from equity raising would predominantly be utilised towards the acceleration of Freedom Foods’ growth strategy which includes acceleration of the capex programs in nutritional ingredients through 2019 and 2020 of $100 million and $30 million in order to help increased working capital requirements to meet the growth in demand. In the release dated June 14, 2019, the company stated that the retail component of entitlement offer was wrapped up on June 11, 2019. The eligible retail shareholders subscribed for 1.5 million new shares under retail entitlement offer, which resulted in garnering around $7.1 million. The company stated that around 0.8 million new shares were not taken up in retail entitlement offer and were underwritten by Veritas Securities Limited and UBS AG, Australia Branch, and sub-underwritten and subscribed for by FNP’s largest shareholder, named Arrovest Pty Limited, which brought total raised under retail entitlement offer to around $11.2 million.

Decent Growth in Top-line Reflects Strength in Revenue-Generation Capabilities: The top-line of Freedom Foods Group Limited has witnessed a CAGR growth of 41.56% in the time frame of between of FY14- FY18 and, therefore, it looks like that the company is possessing decent capabilities to generate revenues. Additionally, the company’s cash receipts have encountered a CAGR growth of 42.42% and, therefore, it can be said that the company has decent capabilities to generate cash. There are expectations that the company’s revenue-generation capabilities coupled with its cash-generation abilities, might help the overall company in achieving unhindered growth. The company has strong operational capabilities, which is evident from a CAGR growth of 37.10% witnessed in cash from operating activities. Coming to the company’s balance sheet, the company’s cash and short-term investments have increased significantly between FY14 and FY18. Also, the company total current assets base has witnessed a CAGR growth of 51.62% between FY14- FY18. It looks like that the company is possessing decent balance sheet which might help the overall company in witnessing growth over the long-term.

Release of Update on Nutritional Ingredients Business Platform: The company recently issued an update on the progress of development of its Nutritional Ingredients Business Platform. It was added that the company entered into the long-term supply agreement for Lactoferrin with a major global pharmaceutical company. The supply agreement would be utilising a significant component of current and planned capacity for Lactoferrin at Nutritional ingredients facility in Shepparton, Victoria.


Key Valuation Metrics (Source: Thomson Reuters)

What To Expect From FNP Moving Forward: The company’s key brands Australia’s Own and Freedom Foods would be at the forefront of driving the returns from innovation and manufacturing capabilities in Australia and international markets. The growth in sales and improving financial returns in Plant beverage business represents deployments towards new capabilities at Ingleburn site in Sydney. There are expectations that this site will continue to deliver improvements and would further contribute materially to the increases in sales and profitability over the medium term as the company focuses on driving its brands in Australia and into SE Asia and China.

Considering the large and significantly increasing base of dairy volume, the company’s focus is on driving a dairy business towards specialty and high value-added products. It was further stated that the cereal and snacks business are well placed to build a significant growth platform in the multiple products, channels and distribution throughout Australia/NZ, China and SE Asia. Considering the current portfolio, product range and new key customers coming on stream, adjusted for short term impact of reduction in the major contract manufacturing arrangements, FNP is anticipating net sales revenue in FY19 to be in lower end of the range of $500 million - $530 million, which is a significant rise on a Y-o-Y basis.

Valuation Methodology: EV/Sales Multiple Approach:

 
EV/Sales Multiple Approach (Source: Thomson Reuters), *NTM: Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: As per ASX, the company’s stock has fallen 16.67% in the span of previous one month while, in the time frame of previous three months, the stock fell by -17.01%. The stock is trading closer to its 52-week lower levels of $3.950, indicating a decent opportunity for accumulation. The company has been experiencing robust demand throughout its business activities in Australia, China, and SE Asia. With respect to the dividends, the company has intentions to pay only 50% franked dividend for any dividends with respect to FY19, which reflects likely reduced tax payments as the company utilises tax losses from the acquisitions and accelerated tax depreciation benefits from current investment phase. Additionally, it was stated that the company expects a return to paying the fully franked dividends from the increased profits after FY21. Based on the foregoing, we have valued the stock using the relative valuation method, EV/Sales multiple, and have arrived at a target price upside of double-digit growth (in percentage term)). Hence, in view of aforesaid facts and current trading levels, we give a “Speculative Buy” rating on the stock at the current market price of A$4.280 per share (up 5.679% on 20 August 2019).

 
FNP Daily Technical Chart (Source: Thomson Reuters)

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