Company Overview: Freedom Foods Group Limited (ASX: FNP) is engaged in the sourcing, manufacturing, selling, marketing and distribution of specialty cereal and snacks and plant and dairy beverages, canned specialty seafood and investment in large scale dairy farming operations. The group operates sales, marketing and distribution activities in Australia, New Zealand, China, South East Asia, and North America. FNP is organized into five segments, namely, Dairy and Nutritional Ingredients, Plant Based Beverages, Cereal and Snacks, Consumer Nutritionals and Specialty Seafood. 


FNP Details

Strong Demand Across Key Markets and Increased Brand Penetration: Freedom Foods Group Limited (ASX: FNP) is engaged in the sourcing, manufacturing, selling, marketing and distribution of specialty cereal and snacks and plant and dairy beverages, canned specialty seafood and investment in large scale dairy farming operations. As on 26 May 2020, the market capitalization of the company stood at ~$1.18 billion. During FY19, the company reported a profitable and productive year in building a major global food and beverage company and delivered an improved financial performance with higher sales revenue and earnings. It continued to experience strong demand across its key markets and channels in Australia, China, and SE Asia. During the year, net sales of the company went up by 34.9% to $476.2 million, and operating EBITDA witnessed an increase of 40.9% to $55.2 million. During FY19, the company has launched over 130 new product formats into retail, grocery, out of home and export markets, supported by increased marketing expenditure as an investment for future growth. The group achieved a net operating profit after tax of $21.9 million, reflecting a rise of 40.1% on the pcp. This was mainly due to an increase in operating EBITDA. During FY19, the group progressed a significant part of the capacity upgrades to its Shepparton dairy facility, which is likely to increase total dairy milk processing capacity to 500 million litres per annum. The decent financial and operational performance enabled the Board to pay an unfranked final dividend of 3.25 cents per share, bringing the total dividend to 5.5 cents per share. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 51.04% in total revenue and a CAGR of 37.47% in gross profit, reflecting the strength of the business and increased market access through the power of collaboration.

During 1HFY20, the company achieved strong growth in retail and MilkLab in out of home channels through key brands, including Australia’s Own and Freedom Foods. Despite the unprecedented impact of COVID-19, the company is experiencing strong demand for key products including UHT dairy and plant beverages and cereals & snacks. 

The group is well-positioned to strategically build a major global food and beverage business with scale in key food and beverage platforms. The increased demand for dairy, plant-based beverage and cereal and snacks reflects the positive impacts on an increased operational footprint and increasing brand penetration and market share in key strategic channels. 


FY19 Financial Highlights (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 52.61%. 


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Increased Profitability and Decent Liquidity Levels: During 1H20, gross margin of the company stood at 27.1%. In the same time span, EBITDA margin of the company witnessed an improvement over the previous half and stood at 11.5%, up from 10% in 2H19. This indicates the increased profitability of the company. During 1H20, net margin was broadly in line with 1H19 and stood at 1.5%. In the same time span, current ratio of the company stood at 1.37x, up from 1.14x in 1H19. This indicates that the company is managing its costs well and is able to pay off its current liabilities using its current assets. During 1H20, Assets/Equity ratio of the company was 1.69x, lower than the industry median of 1.95x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.


Key Margins (Source: Refinitiv, Thomson Reuters)

Increase in Net Sales and Net Profit: During 1H20, the company achieved a growth in key branded categories and channels and reported an increase of 32.6% in net sales to $277.1 million and a growth of 55.6% in operating EBITDA of $32.7 million. The positive results reflected higher sales and earnings contributions from Dairy Beverage, Nutritionals and Plant Beverage business units. The increase in revenue and operating EBITDA resulted in an increase of 45.6% in statutory net profit to $5.4 million. During the half-year, the company achieved a growth of 23% in Australian retail grocery, above category average growth rates of 1.3%. In the same time span, FNP launched 40 new product formats into grocery, retail, export markets, and out of home channels and had an increased focus on building the group’s brands. 

During 1H20, the company reported a stable balance sheet with significant progress in inventory management and total net borrowings of $188.5 million. The company continued to make investments in people to ensure growth and further progressed the transformation of its IT / ERP systems to ensure increased efficiency and productivity. The company has also declared an unfranked interim dividend of 2.25 cents per share. The increasing scale and diversification of the company’s activities provide an important hedge to mitigate potential impacts from short term disruptions in the market.
 

Sales and EBITDA Growth (Source: Company Reports)

Impact of COVID-19: Despite the softer market conditions due to COVID-19, the company did not face any material impact on its operations. It has not witnessed any constraints for the supply of key raw materials or packaging inputs and is experiencing strong demand for its key products, including UHT dairy and plant beverages and cereals & snacks. This reflects the unique scale and diversified activities, including significant Australian-based food manufacturing capabilities. The company is reshaping its operational footprint to ensure a strong position with a positive trajectory towards building a global food and beverage business. 

Future Expectations and Growth Opportunities: During the COVID-19 period, the company has continued to succeed in securing distribution for its MILKLAB brand and is well placed to grow its exposure in Australia and new markets into SE Asia as a leading brand. The ongoing success in key brands and market position offers the company to benefit from increased awareness and strong customer demand. FNP will continue to commercialize several key ingredients into applications under its own brands and is planning to start supply to new customers from June 2020 as new capacity at Shepparton and Ingleburn facilities comes online.

The customer demand is increasing in China from a low point in February 2020. It stated that net sales of the group on YTD basis till February 2020 were 41% ahead on the prior corresponding period. FNP has sufficient financial flexibility and retains strength in the balance sheet to support the business during this period of macro-economic uncertainty.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation Approach (Illustrative)

EV/EBITDA Multiple Based Relative Valuation Approach (Source: Refinitiv, 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 is trading close to its 52-weeks’ low level of $3.810, proffering a decent opportunity for accumulation. The company has shown resilience in these unprecedented times and is well capitalized to benefit from additional growth opportunities. It has not witnessed any production constraints during this period of macro-economic uncertainty and continued to undertake committed capital expenditure projects aligned to customer and channel commitments. Considering the current trading levels, financial resilience despite macro-economic uncertainty and positive long term outlook, we have valued the stock using EV/EBITDA multiple based relative valuation approach and have arrived at a target price offering an upside of lower double-digit (in percentage terms). For the purpose, we have considered Bega Cheese Ltd (ASX: BGA), Tassal Group Ltd (ASX: TGR) and Inghams Group Ltd (ASX: ING) as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $4.27, down by 0.466% on 26 May 2020. 

 
FNP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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