Good Write Up From The Boat Fund - Feb Report

Share price volatility was extreme and often somewhat disconnected to the reported operating performance of the business.  A case in point is our holding in Farm Pride Foods (FRM). FRM delivered growth in after tax profits in the order of 12%+ on the back of modest revenue increases in H1 FY17.  An uncertain outlook statement was provided by management with some reference to excess supply in the last 2 months of 2016. Such swings from undersupply and oversupply are not new to the industry and part and parcel of this type of business.  Unfortunately, many investors did not care, and stampeded for the exit post result.

Egg consumption in Australia is however continuing to grow at solid rates of 7%+ for 2016.  Moreover, the business appears to be performing well with operating margin improving driving a strong balance sheet (no debt, $3M cash).
Over the course of the month the share price declined by 41%, yet the fundamentals of the business have not changed much. With the cooler days of Autumn upon us and Winter around the corner, we believe any oversupply will balance itself out.


Farm Pride Foods Limited (FRM) Reported a solid set of results with revenue growing 2.5% to $49.2M. Operating EBITDA margin expanded to over 16% as EBITDA grew to $7.9M.  This drove a 13% increase in NPAT to $4.3M on the back of reduced interest costs and a flat tax rate.  EPS grew 13% to 7.81 cents. The company finished the period with $3M in cash with no debt.  Adjusted operating cashflow conversion was not as strong as in the PCP at just under 78% of EBITDA.  The company attributed poorer cash conversion to an increase in inventory (eggs) and investment in biological assets (hens).  As discussed above, the company noted a forecast surplus of eggs in the final months of the year on the back of greater certainty concerning the definition of free range eggs, driving an increase in industry production capacity.

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The company reaffirmed its strategy of growing its brands and continuing its focus on cost of processing, investment in new farms, stable cash flows and pursing growth initiatives to position the company for long term sustainable growth.  We estimate FRM will report over 15c eps for the full year and continue to grow its cash balance. Some tailwinds are emerging as feed costs have come down materially recently and this should benefit their margins in the next 12+ months. Based on FY17 estimates FRM trades on an incredibly cheap 7x PE and 3.3x EV/EBITDA multiple.  No dividend is forecast for FY17.  Estimates forecast 8% growth in EPS over FY18.  FRM finished the month down 41%.