Stock of the Day – Goodman Fielder (GFF)

GFF reported a 19% decline in underlying Earnings Before Interest & Tax (EBIT) at $151m. The result was disappointing with planned cost savings under Project Renaissance not eventuating, higher costs and poor execution in baking (reliability issues) made matters worse. Looking forward trading is expected to remain challenging with cost and competitive pressures on Grocery and Baking EBIT in FY15. The only bright spot is the falling milk price in NZ which should see dairy earnings recover in FY15.


GFF Brands (Source – Company Reports)
 
While no FY15 guidance was provided management did say they expect “FY15 to be another difficult year”. Looking forward we believe medium term earnings risk is to the downside as costs continue to rise and GFF’s major customers (Coles and Woolworths) apply further pressure ( terms and private label). GFF needs to spend more on marketing but can’t afford to so the turnaround will be slow.


GFF EBIT (Source – Company Reports)

Last week’s result has again highlighted to us that GFF is caught in the middle of very powerful customers at one end and volatile commodity prices at the other end. Which it is unable to always fully pass on. The GFF board continues to recommend the 67.5cps proposal in the absence of a superior proposal with the targeted scheme implementation date expected to be in December 2014.


GFF Daily Chart (Source – Thomson Reuters)
GFF sits between volatile commodity prices that can be difficult to pass on and dominant customers that use their size and private label brands to gain competitive advantage. GFF is a turnaround opportunity that needs to lift direct marketing expense to build its key brands. This will take time because the company cannot afford to spend what it needs to without crunching near term profitability. We believe that the takeover offer by Wilmar & First Pacific would be the key driver of the share price. Goodman Fielder shareholders are to receive A$0.675 cash per share subject to all necessary conditions being satisfied. The takeover scheme is due to be implemented in December and nothing in today’s result or outlook puts the deal at risk in our view. 

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