Stocks’ Details

Freedom Foods Group Limited

Update on Suspension from Quotation: Freedom Foods Group Limited (ASX: FNP) is engaged in the manufacturing and distribution of plant-based beverages, consumer nutritional products, speciality cereals and snacks, canned speciality seafood, etc.

Key Highlights of the Update: On 25^th June 2020, the company requested a voluntary suspension for its ordinary shares for 14 days, to further investigate its financial position. On 30^th June 2020, Rory Macleod, CEO and MD, resigned from all positions at the company. In a recent announcement, the company notified that it is willing to extend its voluntary suspension until the close of trading on 30^th October 2020, to provide better and up to date information regarding the impact of historical issues, its financial position and outlook. The company also received a waiver from its financiers in relation to financial covenant obligations at 30^th June 2020.

The company also listed some of the significant items to be considered before revealing the above information. These include:

• Investigation of historical issues such as revenue recognition and doubtful debt provisioning, review of inventory levels and the carrying value of inventory, etc.
• Completion of audited annual accounts for the period ended 30^th June 2020 and any impact on prior reporting period.
• Appointment of a permanent CEO and CFO.
• Any capital initiatives to ensure sufficient balance sheet strength and financial flexibility.
• Appropriate guidance for FY21, considering the impact of COVID-19 and any potential operational improvements, strategic and product initiatives.

1HFY20 Highlights: In 1HFY20 ended 31^st December 2019, the company reported net sales amounting to $277.1 million, up 32.6% on pcp, backed by growth across key branded categories and channels. Operating EBITDA and operating net profit increased by 55.6% and 42.1%, respectively.

Segment Results (Source: Company Reports)

Stock Details: The stock of the company last traded at a price of $3.01, on 24^th June 2020. Over a period of one month and three months to the above-mentioned date, the stock corrected by 29.84% and 35.27%, respectively.

Wingara AG Limited

Higher Export Volumes Drive FY20 Revenue: Wingara AG Limited (ASX: WNR) specialises in the processing and marketing of high-quality Australian agricultural products for the export markets through two business divisions: JC Tanloden for Fodder and Austco Polar for Meat Export Service.

FY20 Financial Highlights: During the year ended 31^st March 2020, the company reported revenue amounting to $35.1 million, up 20% on pcp, driven by higher export volumes along with higher value per tonne. The increase in volumes was backed by greater hay purchases in the second half, from the proceeds of the Austco Polar Cold Storage property sale and leaseback. However, overall volumes went down due to Raywood processing machine ramp-up during the first half. Revenue for the JC Tanloden and Austco Polar divisions stood at $21.7 million and $13.3 million, as compared to FY19 revenue of $16.8 million and $12.4 million, respectively. Operating EBITDA for the period stood at $3.3 million. Over the period of FY17-FY20, the company reported a CAGR of ~59.2% in revenue. Shareholders’ funds over the same period reported a CAGR of ~37.6%.

Growth in Key Metrics (Source: Company Reports)

Balance Sheet Position: At the end of the year, net debt stood at $3.9 million, as compared to $25.7 million in FY19. This significant reduction was due to the repayment of debt from the proceeds of sale and leaseback of Austco property. Net debt/EBITDA multiple in H2FY20 stood at 1.2x, as compared to 5.4x in the prior corresponding half.

What to Expect: The company aims to double JC Tanloden’s workforce over the next financial year, to support output capability. The division is on track to produce over 60,000 MT of export fodder in FY 2021 and cater to the strong demand from customers in Asian export markets. Austco Polar’s throughput volume is expected to remain subdued until Q3FY21 and the company expects the latest international trade disputes to cause disruptions on the client front.

Growth Strategy: The company will continue to expand JC Tanloden and expects to build a storage capacity in excess of 80,000 MT over the next five years. Moreover, it expects to improve Austco operations over the same time frame, by building strong relationships with key long-term customers and expects to increase blast freezing and logistic throughput to 70,000t per annum.

Growth Strategy (Source: Company Reports) 

Key Risks: Although are denominated in USD the company has had a limited impact of COVID-19 on its operations with the most significant being the slowdown at ports, it is witnessing increasing disruptions and schedule changes from global shipping liners which may impact its working capital, going forward. The Group is also exposed to foreign currency risk on trade receivables and cash at bank that is denominated in USD.

Stock Recommendation: The stock of the company gave positive returns of 6.38% in the past 3 months. Over a period of 6 months, the stock has corrected by 13.79%. Currently, the stock has a P/E multiple of 33.33x. The company has an EV/Sales multiple of 1.8x on a trailing twelve months (TTM) basis, as compared to the industry median (Food & Tobacco) of 1.6x. EV/EBITDA multiple on TTM basis stands at 16.2x, higher than the industry median of 7.8x. As on 31^st March 2020, cash and short terms investments of the company stood at $3.45 million and total debt came in at $0.97 million. Considering the above factors coupled with the FY20 results and 5-year growth strategy, we advise investors to wait for further catalysts to drive the stock, and thus, have a watch stance on the stock at the current market price of $0.22, down 12% on 9^th July 2020.

Treasury Wine Estates Limited

Restructuring of the US Business to Deliver Cost Savings in FY21: Treasury Wine Estates Limited (ASX: TWE) is primarily engaged in the production, marketing and distribution of wine.

Business Performance across Key Markets: Reopening of China has led to a recovery in consumption and sales. The company has a strong online channel to address the changed buyer behaviour. However, it is yet to fully recover to previous levels in the region. In the Americas, and the US specifically, the retail channel remained strong, with continued premiumisation driving over 20% value and volume growth in luxury and masstige portfolio price points in comparison to the prior year. Overall, wine market conditions in the US have been challenging. In Australia, strong retail channel performance continued to be at elevated levels as compared to pcp. In Australia and the US, other key sales channels including on-premise, cellar doors and global travel retail were closed for a significant portion of 2H20, which impacted overall portfolio performance.

Update on Strategic Initiatives: In a step to reduce the size and scale of its commercial wine business in the US, the company has completed the implementation of operating model and organisation structure changes in the US business, to align the overhead cost base with the future volume and margin objectives of the business. These changes will deliver annualized cost savings of at least $35 million in FY21. In addition, the company began the potential divestiture of selected commercial wine brands and assets in the US and commenced restructuring its supply chain, to accelerate its margin premiumisation strategy in the Americas. The company is progressing on the potential demerger of Penfolds expected by the end of CY21, which will enable separate focus for both Penfolds and TWE’s other brands.

During 1HFY20, the company generated revenue amounting to $1,551.2 million, down 1.6% on a constant currency basis and up 0.9% on a reported basis. Revenue in Asia went up by 6.9% on pcp, on a constant currency basis.

Revenue by Region (Source: Company Reports)

FY20 Guidance: The company expects FY20 EBITS to be in the range of $530 million - $540 million, after incorporating the significant impact of COVID-19 on the company’s trading performance across all geographies through 2HFY20. As compared to the previous year, FY20 EBITS represents a decline of ~21%, with regional declines of approximately 14% in Asia, 37% in the Americas, 16% in ANZ and 18% in EMEA. Cash conversion for the year is expected to be higher than 80%.

Key Risks: The company’s operations are exposed to climate change risks which may adversely impact its performance. The company’s ability to fulfil wine demand depends on the availability of grapes, which can be challenged by climate change, agricultural and other factors. Heavy reliance on suppliers, distributors, and retailers for delivery of key strategic initiatives can prove to be a hurdle at times of suboptimal performance of these parties.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock has corrected by 30.92% over a period of the last 6 months and is currently inclined towards its 52-week low level of $8.4. At the end of F20, the company had total liquidity of approximately $1.4 billion, comprising cash on hand of approximately $448 million and undrawn committed debt facilities of $920 million. We have valued the stock using a P/E multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). Hence. considering the aforesaid factors and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $10.95, down 2.926% on 9^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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