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

Significant Growth in Net Sales and EBITDA: Freedom Foods Group Limited (ASX: FNP) is engaged in sourcing, manufacturing, selling, marketing and distribution of specialty cereal and snacks and plant and dairy beverages. As on 18 February 2020, the market capitalisation of the company stood at ~$1.29 billion. The company has leveraged its strength and has evolved into a brand led business. FNP continued to experience high growth through its key brands including Australia’s Own and Freedom Foods in retail and MILKLAB in out of home channels across the key markets of Australia, China and South East Asia. During FY19, net sales of the company went up by 34.9% to $476.2 million, and operating EBITDA (earnings before interest, taxes, depreciation and amortisation) witnessed an increase of 40.9% to $55.2 million. This reflects increased sales and earnings contributions from dairy beverage, nutritionals and plant beverage business units, offset by reductions in cereals & snacks and specialty seafood. This resulted in the group to achieve an operating net profit after tax of $21.9 million, a gain of 40.1% on the prior period. The decent financial performance of the company enabled the Board to declare an unfranked final dividend of 3.25 cents per share, reflecting an increase of 0.50 cents per share from the prior year’s final dividend. During the year, the company successfully launched over 130 new product formats into retail, grocery, out of home and export markets which was supported by an increased marketing expenditure as an investment for future growth. The group is one of Australia’s leading investors in state-of-the-art food and beverage manufacturing capability, investing more than $170 million in plant & equipment in full year. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR (Compounded Annual Growth Rate) of 51.04% in revenue and a CAGR of 37.47% in gross profit. 

The company is well-positioned to build into a major global food and beverage business and is experiencing an ongoing demand across its business activities. This growth in demand shows an encouraging impact on the company’s expanded operational footprint and rising brand penetration in key strategic channels in Australia, South East Asia and China.

The company has an adequate supply of key grain raw materials for the upcoming year. The new brands which were recently launched are expanding at a tremendous rate and have the potential to become global success stories. As per the company’s report, the group did not fully benefit from the key capital expenditure initiatives and expects that these initiatives will increase sales and earnings into FY 2020 and beyond.


FY19 Financial Performance (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Freedom Foods Group Limited. Arrovest Pty. Ltd. is the largest shareholder in the company, with a percentage holding of 52.67%. 


Top 10 Shareholders (Source: Thomson Reuters)

Sufficient Liquidity Levels with Stability in Balance Sheet: During FY19, gross margin of the company was in line with the previous year and stood at 24.8%. In the same time span, net margin and Return on Equity of the company stood at 2.4% and 1.9%, respectively. During FY19, current ratio of the company stood at 1.56x, higher than the industry median of 1.42x. This indicates that the company is liquid enough to pay off its current liabilities using its current assets as compare to its peer group. The company also reported a stable balance sheet with Debt/Equity ratio of 0.26x, slightly lower than the industry median of 0.28x. In the same time span, Assets/Equity ratio of the company was 1.47x, lower than the industry median of 2.05x. This implies that the business is financed with a larger proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.


Key Margins (Source: Thomson Reuters)

Sales by Key Segments: The company is the fastest growing branded supplier in the Australian Grocery market and saw an innovative approach as a key competitive advantage. The group is organised into five segments, including Dairy and Nutritional Ingredients, Plant-Based Beverages, Cereal and Snacks, Consumer Nutritionals and Specialty Seafood. During FY19, Sales from Group Brands increased by more than 48.5% of total sales. Out of the five segments, Dairy and Nutritional Ingredients contributed $249.26 million in the total revenue followed by revenue of the Plant-Based Beverage segment of $104.9 million. The cereal and snack operations delivered increased sales in key branded products but with total sales and earnings contributing less than last year.

During FY19, the company witnessed a growth of over 37.5% from its domestic market (Australia), contributing around $103.4 million in sales growth for the group. This was mainly due to increased sales of grocery, out of home products, industrials and pharmacy which, however, was offset by a decline in contracts.


Sales by Key Segments (Source: Company Reports)

Growth in Blue Diamond /Plant-Based Beverage Portfolio: The company’s plant-based portfolio under Blue Diamond and MilkLab brands in both the retail and out of home channels performed well with increasing growth rates in the first half of FY20. The company has additional filling capacity at its Ingleburn facility, which will provide continued growth in the plant-based beverage portfolio in both domestic and export markets. The company has also confirmed that all sites continue to remain fully operational and none of its dairy farms or sites was affected by the recent bushfires.

Completion of New Group Financing Facilities: The company announced that it has entered a new syndicated banking facility with HSBC and NAB for $407 million for a term of 3 years. This facility will provide a more flexible finance and liquidity structure and will assist the company in the ongoing growth over the medium term. The company, in another release, has announced that Australian Fresh Milk Holdings (AFMH) has acquired Torrumbarry Aggregation and become the largest dairy producer in Australia. FNP, which has a 10% interest in AFMH, has contributed $4.0 million in equity funding and intends to exploit a growing proportion of the dairy milk output for its milk supply needs.  

Realigning Capacity to Support Growth: Freedom Foods Group Limited built a major Global Food & Beverage Company from Australia but made a strategic decision to exit several major contracts manufacturing arrangements for the key brand and private label customers in cereals and milling related activities. These contracts were below the company’s margin criteria, and FNP is confident that this decision for growth and further opportunities will offer the company with increased financial returns in the longer term.

Growth Opportunities and Future Expectations: The company is leveraging its significant growth abilities to develop a branded high-margin product portfolio in specialty nutritional products, providing diversification in sales, along with growth in earnings from its key markets and channels. FNP has contracted around 400 million litres of milk supply in FY20 with planned production of 350 million litres. The company is attracting farms that are dedicated to produce premium quality milk for the long-term and has contracts to supply its plan in FY20 at fixed milk prices. The group also expects an increase in revenues and operating profits. The company expects that the launch of new products has the potential for global success. 

The company will continue to evolve its scaled dairy capabilities into high value added and protein based ingredients. It expects that new product revenue streams will positively impact sales and earnings in FY 2020 and beyond. FNP intends to invest over $100 million in capital investments over the span of two years.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Approach

EV/Sales Multiple Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of FNP gave a return of 16.30% in the past six months and is inclined towards its 52-weeks low levels of $3.950. This offers a good opportunity for investors to enter the market. In the future years, the company expects to grow organically, leveraging its capabilities product development and its core business activities. During FY19, the company delivered an improved financial performance with higher sales revenue and earnings.The company is targeting growth beyond Australia and New Zealand through the key export market in Asia and North America. Considering the returns, trading levels, decent growth opportunities and improving margins, we have valued the stock using relative valuation method, i.e., EV/Sales multiple, and arrived at a target price of lower double-digit growth (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $4.630, down by 1.699% on 18 February 2020. 
 
 
FNP Daily Technical Chart (Source: Thomson Reuters)

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