Freedom Foods Group Limited

Retail Entitlement offer: Freedom Foods Group Limited (ASX: FNP) is involved in manufacturing, selling, marketing and distribution of specialty cereal and snacks and plant and dairy beverages. The market capitalisation of the company stood at ~A$1.39Bn as on 18^th June 2019.

The company with the help of release provided additional information on its retail entitlement offer. The company stated that 2,335,859 fully paid ordinary shares would be issued pursuant to the retail component of the Entitlement Offer. However, the information was also provided on 2,850,000 unlisted options. The consideration for the new share will be $4.80 per new share which are to be issued on 19^th June 2019 and commence trading on ASX on 20 June 2019 while the employee options are exercisable at $5.75 each on or before 30th November 2020.

The Placement and Entitlement Offer have been undertaken to finance the company’s growth strategy like accelerating capital expenditure programs in nutritional ingredients and to increase the working capital in order to meet demand growth.

Key Takeaways from Investor Presentation: Freedom Foods Group Limited is strategicallywell placed to build into a significant international food and beverage business. FNP had made an investment of more than approximately $400Mn in the state-of-the-art infrastructure for its products in recent years.


Gross Sales in Branded Products (Source: Company Reports)

Future Aspects: The Company is expecting a continuous strong demand for dairy products including UHT milk from export markets. The Company estimates FY 2019 Net Sales Revenues to be in the range of $480Mn - $490Mn, implying an increase of $127Mn - $137Mn or 36 - 39%. Despite a significant capital expenditure program is in progress, FNP expects increasing margins in 2H FY19, which is reflecting sales mix and increasing operational leverage.

Stock Recommendation: The forecasts related to “milk deficits” in China and SE Asia reflect increasing demand for dairy proteins and supply constraints in domestic market supply relating to high cost of production, high feed inputs and the climate challenges to efficient dairy production. The gross margin of the company stood at 24.7% in 1HFY19, reflecting YoY growth of 1.4%. On the stock’s performance front, it had generated a return of 9.83% and 5.54% in the time span of three months and six months, respectively. Hence, considering the above-stated facts and decent outlook, we give a “Buy” recommendation on the stock at the current market price of A$5.380 per share (up 4.669% on 18^th June 2019).
 

Costa Group Holdings Limited

Update on Initial Substantial Holder: Costa Group Holdings Limited (ASX: CGC) is engaged into growing, packing and marketing of fresh produce. The market capitalisation of the company stood at A$1.25Bn as on 18th June 2019. Recently, the company informed that Pendal Group Limited (PDL) became a substantial holder of the group with voting rights of 5.05% since 12th June 2019.

Chairman and CEO’s Address on AGM: With respect to the Berries, the company added that blueberry performance was mixed, with strong production volumes from the Corindi NSW farm which has been offset by lower volumes from the end of the Far North Queensland season.When it comes to the Mushroom, it was mentioned that the financial targets had been met for the period of six months ending to Dec 2018. It was mentioned that the expansion of Monarto South Australian facility might help in addressing production capacity constraints. The revenue of the company stood at $478 Mn for the half year ending to Dec 2018, reflecting a decline of 2.4% on pcp basis while the EBITDA-S stood at $35.3Mn witnessing a fall of 42.0% in comparison to the prior period. However, NPAT-S stood at $28.6Mn in 1HFY18 in comparison to $8.5Mn for FP2018 as depicted by the following picture.


NPAT-S Before Material Items (Source: Company Reports)

What to Expect: The company updated its guidance on EBITDA-SL to be in the range of $140Mn – $153Mn in comparison to the pro forma CY18 EBITDA-SL result of $125Mn while it is expecting NPAT-SL in the range of $57 Mn – $66 Mn in comparison to the NPAT-SL of  $56.6 Mn of CY18. It is focused towards export market development, with 60,000 trays exported in 2018, and planning to substantially increase these volumes in the upcoming years.

Stock Recommendation: The company is undertaking a major long cane raspberry and blackberry initiative which would allow CGC to better match supply and demand, and level seasonal peaks from 2020 onwards. The current ratio of the company stood at 1.51x in FY18 in comparison to the industry median of 1.40x. This represents that the company is in a decent position to address its short-term obligations in comparison to the broader industry. Meanwhile, the stock has generated negative YTD return of 45.54% and is hovering around its 52-week low price of $3.560. We presume that there is a lack of positive catalyst at the current juncture which can boost the stock higher. By looking at its performance in six months financial period to December 2018 and current trading level, the stock can be avoided at the current market price of $3.880 (down 0.767% on 18 June 2019).  

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