Let me start by saying that attempting to time a stock bottom is notoriously dangerous. Indeed, I've been burnt a few times attempting it in the past. However, it can also be an extremely rewarding way to make profits in the share market, particularly for those with a keen eye for value. The key question here is, "Has the time come to enter Halo Foods Group (ASX:HLF)?"
As of Nov 2021, following i) a re-brand (name change from KTD), ii) the gradual exit of disgruntled Founders and Ex-Management (James Gong & Vivienne Cheung) and iii) off the back of two significant deals recently announced by Halo Foods Group (including a massive $54m AUD deal over 2 years with Theland New Cloud Digimart in China), I think that the current state of play (a long drawn out downtrend) might be in the early stages of showing a state of reversal...
From a TA perspective, we have now witnessed a triple bottom of the share price at 11c in June, August and Nov, respectively of this year. Secondly, we are finally seeing the Accumulation/Distribution indicator show some signs of recovery. Since 2018, the A/D indicator has fallen dramatically as major holders dumped stock into a retail investor crowd. However, since June 2021, we have finally seen the A/D indicator level out and start rising, suggesting that the stock is now in a period of accumulation around current levels.
For KTD/HLF, the downtrend since 2018 was disastrous; a combination of an overpriced IPO, failed acquisitions and a lack of trust in KTD/HLF's previous management. But, what causes a reversal of a long term downtrend? Quite simply, it occurs when excess selling pressure stops. This unique moment in which the forces of supply and demand find equilibrium and reverse often occurs at two key junctions. Firstly, the company in question needs to have improving underlying business performance. With strong top-line growth and a move into EBITDA profitability for both the AUS and NZ business (confirmed at the recent AGM), I think we can objectively state that business performance has improved. I'm quite impressed by the ongoing growth of the business towards the major milestone of $100m in annual revenue and the improvement (albeit slower than we would like) towards group profitability.
Secondly, the turning point often occurs when share prices fall to a level in which
clear value can be seen from investors, in the context of the risk/reward on offer. With 274M shares on issue, at a share price of 14 cents, HLF trades at a market cap of $38m. For a company that recorded revenue of $51m in FY21 (financial year ending March 31st) [net profit of -$8m], up from $23m in FY20 [net profit of -$7.5m], and that is on track for run-rate revenue between $80m-$100m and annual EBITDA profitability, I would suspect that investors now believe $38m is a very reasonable price to pay for this business... 11c corresponded to a valuation of merely $30m... it is not a surprise to me that buyers stepped in at this level...
Indeed, the current valuation is particularly intriguing when the sector trades on 15-20x EV/EBITDA and circa 1.0 - 2.5x revenue, suggesting that HLF's upside could be in the order of multi-bags if profitability is achieved and sentiment shifts. From here, I want to see the final remnants of the share overhang (VC) cleared, I want to see ongoing top-line growth and a gradual shift towards group profitability. F&B/FMCG is most often a volume game because of low margins in the sector and HLF's CEO has made it clear that top-line growth remains a core focus and is not stopping anytime soon. I'm on board with this strategy. HLF could also be an acquisition target now that it is at scale for an acquirer to strip away overheads and build a profit.
If ongoing growth is coupled with some news of EBITDA profitability across the next couple of quarters, there is more than a fair chance that Aussie insto funds will find this a very interesting play. Risks of course remain, but I personally picked up more shares at 14 cents yesterday. I think there is a fair chance HLF will break the shackles of its past, soon turn the corner into a share price uptrend and trade back above 20-25c again soon. A market cap valuation of $100m, once at group EBITDA of $5m would be fair in my books.
I think our time is coming.
(20min delay)