Murray River Organics lists on the ASX

Murray River Organics lists on the ASX 16.12.2016 12noon (AEDT) under the ticker MRG.
Why we like Murray River Organics:

• Impressive management team: entrepreneurial management team with strong farming and commodity backgrounds. Have been highly successful with past business ventures. Very focused on financial returns.
• Market leader: MRG is the largest organic dried vine fruit producer in Australia and the world.
• Vertically integrated supply chain: farming, processing and packaging, value adding, logistics, marketing and distribution.
• Leveraged to strong industry fundamentals: its organic positioning means that MRG has exposure to the strongly growing ‘health and wellness’ thematic. The organic food and drink market is growing at a 9.5% CAGR and attracts a premium price point. Global snack food market is one of the fastest growing segments, particularly healthy snack foods.
• Non-perishable product with multiple uses: MRG has a focus on products that have a long shelf life. One of the advantages of dried fruit is that it can be stored for at least two years (so not a price taker). MRG also has a diversified end-use for its products. The recent acquisitions of retail focussed food businesses further diversifies its product offering.
• High margin business: organic dried vine fruit generates gross margins of c50%.
• Strong earnings growth story as the vines mature.
• Diverse customer base in Australia and overseas: services over 26 countries. Not reliant on China for growth.
• Barriers to entry: there are very few places in the world which can grow dried fruit and there is a reasonable lead time (four years) in an orchard maturing. A lack of recent plantings globally and significant capital requirements restrict competition. The method of conversion from wine to dried fruit varieties adopted by MRG is propriety to company. Achieving organic certification isn't easy.
• Warrants corporate appeal.

Strong earnings growth story:

• Strong earnings growth forecast in FY17 – Revenue, EBITDA and NPAT is expected to grow by 50%, 87% and 113%, respectively. Remember that earnings are skewed approx 70% to the second half because of the farming cycle - harvest is December through to March.
• FY17 doesn’t reflect the true earnings potential of the group:
  • c50% of vines are yet to mature.
  • No synergies from food businesses and moving them to the new Dandenong facility.
  • No cost savings from consolidating four facilities into one.
  • FY17 includes all the costs and capex and very little return on this new investment.
• MRG’s production is expected to grow significantly as the current vines mature (improves vine yield) and additional acres are planted out. FY17 group tonnage rises from 9,817t to 13,866t by FY21 (+41% growth). EBITDA (including food businesses) increases from A$15.9m in FY16 to A$29.3m in FY21 (+85% growth).

Clear strategy for future growth:

• Maturation story: Medium term growth to be driven through maturation of existing vineyards, as well as further plant out of existing acreage.
• Synergies from recent food business acquisitions: MRG intends to integrate these businesses, their assets and brands under its one management team, one facility and implement its uniform operational, marketing, sales and distribution strategies.
• Consolidation of processing facilities: and realise material efficiencies.
• Leverage the health and wellness thematic: The organic food market is one of the fastest growing food sectors globally, particularly healthy snack foods.
• Broaden the product range (NPD) and enter new geographies.
• Further acquisitions of both vineyards and food businesses: MRG will continue to identify new acquisitions that complement the core business, in addition to diversifying and broadening its existing product range.

The IPO price of A$1.30 represents an EV/EBITDA of 9.0x and a PE of 17.1x. Remember that in FY17, MRG is incurring a lot of expense and capex without the associated earnings benefit which will flow through in future years. MRG's multiples drop away materially over coming years as the vines mature. Our DCF valuation for MRG is A$1.55 per share. If MRG was to rerate in the after market to peer multiples (FY17F EV/EBITDA of 11.3x), this would imply a share price of A$1.72 or 32% upside on the issue price.