Freedom Food; MilkLab a diamond in the rough?

Will the world transition to alternative meats and plant-based foods?
We think the world will transition to alternative meats and plant-based foods. Our current meat consumption is unsustainable as i) it
contributes to climate change ii) there is increasing evidence that eating meat causes disease iii) we don’t have enough land to feed our growing population.

Beyond Meat’s elevated multiples and the recent listing of Oatly at 20x EV/CY20 sales is a sign of expectations in this space. Time will tell whether these companies can create a sustainable competitive advantage or whether competitors will be able to easily replicate their products as alternative meats become more popular.

FNP has had a rough 2020
This brings us to Freedom Food. Freedom Food hasn’t had a good 2020 (to say the least). The company was caught cooking the books (overstating profits, assets). Their management resigned mysteriously before the accounting scandal. Two separate shareholder class actions have been launched against the company. Regulators are investigating the company to determine whether this was incompetence or fraud. Their supplier has taken legal action against the company for selling a competing product.

The company has serious issues and uncertainty. Additionally, the accounting scandal has led to terrible perceptions of the company.

MilkLab; diamond in the rough
However, what has caught my attention with the stock is their plant-based milk division. Specifically, their MilkLab brand. My go-to coffee is an Almond flat white and all the good cafes I’ve been to use MilkLab. MilkLab is plant-based milk designed specifically for baristas. As plant-based milk increase in popularity, baristas are searching for plant-based milk that has a similar consistency and creaminess to dairy milk (so it can be whipped up in the same way). The company sells MilkLab to over 8,000 cafes (there are 40k cafes in Australia). One cafe has said that over 80% of the coffees she sells is plant-based and that they absolutely love MilkLab. MilkLab has also recently signed a distribution deal with McCafe. We estimate MilkLab to be generating $90m annual sales.

This brand is well-loved by baristas and is considered top quality. The company reports MilkLab in their plant-based division.

The ultra bull view is MilkLab is should be valued on Oatly multiples (20x EV/CY20 sales). Let's assume investors think MilkLab is inferior to OatLy but still assigns a 10x EV/CY21 sales multiple, MilkLab will be worth ~$900m Enterprise Value.

How much is the company currently worth?

Enterprise value of $350mn.

The company issued $200m convertible notes (exercise at $.70/shr, maturing in 6 years). If converted, the notes will own 60% of equity.

Is it a buy?

We think it's a value bet. There's a chance the company could go to 0 (we've made an estimate of 30%, but this is a finger in the air type of number) but there's a good chance that there's 100% upside at current stock price levels as well.

If you want further views on the upside/downside and forecasts/valuation, take a look here @BusinessBytes/freedom-food-c9ddc329e78c" target="_blank" rel="noreferrer noopener">https://medium.com/@BusinessBytes/freedom-food-c9ddc329e78c.

Let us know what you're thinking about Freedom. Feels like a super risky one to get into.