FNP has provided a trading update. COVID has resulted in some one-off impacts including: a material EBITDA hit from the largely shut OOH and Foodservice channels; an A$4mn bad debt provision; and an cA$5mn restructuring provision that will streamline operating costs going forward. All this adds up to a material impact on 2H20 EBITDA. The company has also decided to take an inventory write-down related to exiting obsolete and non-core SKUs. While painful in the short term, we believe this will result in a more focused, lower operating cost business as we move into FY21. We revise our FY20E EBITDA by -26%. Our 12m TP declines 12% to A$5.75. With this offering 55% upside, we maintain our Buy rating (on CL). We are confident the broader strategy anchored around nutritional dairy and plant based beverages remains on track, but the current environment has certainly had an impact. The company has undergone significant investment in recent years, in terms of capital expenditure and new product development (NPD). As that strategy evolves, FNP has reviewed its product offering and will reduce the number of SKUs. That said, the core drivers should still deliver strong revenue growth at high margin as contracted volumes ramp up in its newly installed capacity in nutritional dairy and plant based beverages. We don’t see FNP needing to raise capital in the short term despite elevated leverage. The company has agreed with its banks to lighten covenants for 18 months. We expect earnings to grow significantly in FY21, reducing net de bt to EBITDA to fall to 1.6x. Capex should fall from $125mn in FY20 to below $30mn in FY21, as the company has completed its large capex program and has announced pull forward of some spend, which would be below depreciation. NPD should continue to reduce as the company narrows its focus. While FY21 operating cash flow could be impacted by the provision releases taken in FY20, we would expect a much improved free cash performance. Notwithstanding disruption to the out of home channel, the fundamentals of nutritional dairy and plant based beverages are largely unchanged. Demand for dairy nutritionals has remained in line with expectations, and c.80% of FY21 output has been contracted. We believe the Nutritional dairy division is still on track to deliver >40% returns. MilkLab is to be stocked nationally in McDonalds, which will see an increase in sales and distribution from July, and we think the target of 30k distribution points in Australia (from c.12k presently) remains achievable. Implications for other stocks We see some negative impact potentially for BGA from the weak cream prices in the 2H20. Elsewhere, it’s clear that despite a relatively staple food product base, COVID is having widespread impacts and few companies will be unaffected. FNP’s decision to fast-track a restructuring and efficiency drive could be similar to what other companies/boards’ may be thinking as they contemplate the global economy post-COVID, and we could see similar decisions made across other stocks in our coverage. Earnings and target price revisions We cut our FY20E EBITDA forecast by 26% to A$72.8mn (prev. A$98.4). However, as the company enters FY21 with a lower cost base and as the ramifications of COVID potentially ease, the quantum of our FY21/FY22 EBITDA reductions are lower (-13%/-6%). We cut our FY20 EPS by 52%, as we factor in a pull forward in NPD amortisation associated with SKU rationalisation. Our EBITDA revisions reflect: n n n n A$10-12mn impact in plant-based beverages as a result of OOH channel disruption. Although this channel is starting to reopen, we expect some impact into 1H21. A$6mn impact from lower dairy earnings related to cream sales. A$4mn impact from weaker export sales into SE Asia and China OOH channels. One off costs related to restructuring and rationalisation, which we include above the line. We expect the company will include c.A$4-5mn in redundancy costs in FY20, which should be offset by a A$10mn annualised saving from FY21. The internalisation of warehouses should result in a A$10mn saving by FY22.
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