Be patient for bounce, page-65

Freedom Foods GroupEquities12-month rating12m price targetPriceRIC: FNP.AX BBG: FNP AUTrading data and key metrics52-wk rangeMarket cap.Shares o/sFree floatAvg. daily volume ('000) Avg. daily value (m) Common s/h equity (06/19E) P/BV (06/19E)UBS Evidence Lab inside: Knocking on Asia's door – initiate with BUYLeading player in Dairy & Plant Based UHT products – initiate with BUY ratingFreedom Foods (FNP) is a leading Australian vertically integrated manufacturer of UHT Dairy & Plant Based Beverages (UBSe ~38% CY18 share) and healthy Cereals & Snacks, with a significant Asian expansion opportunity. FNP is focussed on growing its brands business (~60% of YTD revenues) through leveraging a wide range of offline & online channel partners, underpinned by a rapid product development cycle (new product development ~23% of YTD revenues). Following ~$370m of capex over FY17-19E to expand its manufacturing capacity and Nutritional capabilities, we believe FNP is now well positioned to expand both domestically and offshore, with 52% EPS CAGR forecast over FY19-22E. We initiate coverage with a Buy rating and $6.70 PT.Returns reaching an inflection point - pre-tax ROIC to reach 17% by FY22EWe expect FNP to deliver FY19-22E EPS CAGR of 52% underpinned by: i) Increased milk supply (+55% CAGR FY18-20E) through its expanded UHT facilities; ii) Increased margin accretive branded sales; iii) Operating leverage as recent expansion is scaled (EBIT margin +490bps FY19-22E); and, iv) Growth in higher margin Nutritionals (87% EBIT CAGR FY19-22E). We expect this to drive FNP’s pre-tax ROIC to ~17% in FY22E from ~8% (adj.) in FY18; implying an average incremental ROIC of ~26% across FY18- 22E. While medium-term sales execution risks remain, we believe FNP's growth opportunities will become increasingly visible over the next 12 months with ample upside risk to earnings medium-term from acceleration of lactoferrin sales.Key risks and catalysts heading into the 1H19E result (UBSe < consensus)We see some risks into the result with UBSe ~10% and ~20% below consensus EBITDA and EPS for FY19E, albeit consensus data is limited. We estimate 1H19E Revenues, EBITDA and EBIT of $221m, $23.0m and $13.5m respectively and a 60-65% 2H weighting for EBITDA and EBIT due to ramp up of recent capex initiatives. In our view, greater granularity around the Nutritionals opportunity into FY20E is a potential catalyst and we expect FNP to reiterate FY19 sales guidance of $500-530m (UBSe $502m). Debt levels are likely to be elevated at 1H19E (capex/working capital), with UBSe net debt of ~$160m, but we expect this to unwind in 2H19E (2.1x EBITDA).Valuation: $6.70 PT (DCF/SOTP)Our valuation is $6.09ps (DCF/EV multiple). Our price target is $6.70ps based on a roll- forward of our valuation (less forecast dividends).BuyPrior: Not RatedA$6.70Prior: -A$5.28AustraliaFood Retailers & Wholesalers Net debt / EBITDA (06/19E)EPS (UBS, diluted) (A$)A$7.00-4.37 A$1.29bn/US$0.93bn 244m (ORD) 44% 148 A$0.7 A$0.54bn 2.4x 2.1x 06/19E 06/20E 06/21EFrom To % ch- 0.095 - - 0.201 - - 0.290 -Cons.0.122 0.219 0.302 Josh KannourakisAnalyst [email protected] +61-2-9324 3736Jordan Rogers, CFAAnalyst [email protected] +61-2-9324 3639Apoorv SehgalAnalyst [email protected] +61-2-9324 2715 Highlights (A$m) 06/16Revenues 170.406/17 06/18262.5 353.0 501.7 14.4 26.0 38.1 9.8 19.4 23.7 0.050 0.089 0.095 0.045 0.050 0.060 (181.0) (36.1) (125.6)06/20E 06/21E 06/22E 06/23E660.8 828.2 899.3 976.8 76.0 107.3 123.0 135.0 49.9 72.1 83.6 92.70.201 0.290 0.336 0.3730.070 0.080 0.120 0.133 (118.2) (78.1) (24.3) 25.506/20E 06/21E 06/22E 06/23E11.5 13.0 13.7 13.8 11.5 15.7 17.7 19.2 13.5 10.0 8.5 7.5 26.3 18.2 15.7 14.21.8 4.5 5.8 6.21.3 1.5 2.3 2.5 EBIT (UBS)Net earnings (UBS) EPS (UBS, diluted) (A$) DPS (A$)Net (debt) / cash14.510.7 0.060 0.040 (39.9) Profitability/valuation 06/16EBIT margin %ROIC (EBIT) % EV/EBITDA (core) xP/E (UBS, diluted) x Equity FCF (UBS) yield % Net dividend yield %06/17 06/18 06/19E 8.5 5.5 7.4 7.6 6.0 3.5 5.0 6.4 30.0 37.2 29.5 22.7 57.1 89.9 56.1 55.4 (9.8) (15.6) (10.6) (5.9) 1.2 1.0 1.0 1.1 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of A$5.28 on 06 Feb 2019 19:43 EST06/19E www.ubs.com/investmentresearchThis report has been prepared by UBS Securities Australia Ltd. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 44. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be todd.hoare@ crestone.com.auaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.todd.h