Morgan's broker report

https://my1.morgans.com.au/r.cfm/F774304D-6568-4287-A837-8F37CCFBE274

This is the best broker analysis I have seen to date.

Some really good information in there, some of the best parts I saw were-

• High barriers to entry – For a competitor like Kinder Surprise to enter the US market, it would need to re-design their product in order to obtain regulatory approval. The 1938 Act bans “the sale of any candy which has embedded in it a toy or trinket”. A new product design must pass the “choke test” which would require a new capsule design and a one piece toy. The re-design and investment in manufacturing capability would come at a considerable cost in order to compete with Yowie on a large scale.
• Walmart validates product appeal – It is notoriously difficult to be included in the Walmart planogram (floorplan) and the national roll-out of the Yowie product was achieved within 11 months. To put this into context, it has taken other companies years to get into Walmart. This achievement was the result of its consistent sales performance during the product’s trial period that began with a 50 store trial in Texas during September 2014. This trial was extended in March 2015 to a roll-out across 1,500 Walmart stores. From November 2015, the Yowie product was on sale in all +4,500 Walmart stores. In our view, this is a significant achievement and validates the saleability of the product. The retailers are also supportive of the product given it is a high margin sale for them.

• Numerous licensing opportunities and revenue streams – The confectionery product is core to the group and expected to drive brand awareness. We note that over 2m Yowie books were sold in Australia alone and there is potential to drive meaningful revenue from other licensing opportunities. These opportunities include digital, TV/film, books and merchandise. YOW has recently announced a licensing agreement with Angry Birds, which we think will pave the way for more licensing opportunities in the future.

• Strong corporate appeal – We think it makes sense for a large international FMCG company to own this brand. We believe this product would appeal to a FMCG company with the manufacturing capacity, purchasing power, balance sheet and global distribution network to capitalise on the unique market dynamics in the US and global expansion.

• The Angry Birds chocolate candy launch will occur at the same time of the release of a new Angry Birds movie in May 2016. We believe that YOW will pay 5% of net sales as a royalty to Rovio Entertainment, the developer of Angry Birds. This arrangement should not impact YOW’s margins given the licensing deals have a higher selling price.
  
  The wholesale price is approximately US$1.70 and while retail prices will differ, the mark-up per unit (US$0.80+) makes Yowies a high margin product for the retailers compared to other confectionery items. The stackable nature of the packaging also makes the product a high yielding item for the retailers with little shelf space required. The colourful packaging also catches the eye of consumers and provides an attractive display item for retailers.
  
  We also highlight the takeover by Albertsons of Safeway, which was completed at the end of January 2015. The merged group is believed to have over 2,200 stores throughout the US and by default, a roll-out in Safeway may soon result in a roll-out in the Albertsons +900 stores.
  
  Based on retail data for the top 100 US retailers, we estimate the store potential for Yowie to be over 72,000 for these stores alone (see Appendix). We note that Yowies are already being sold in over 3,000 stores that fall outside the top 100 US retailers. The company has a focused strategy to target 19 core accounts who represent approximately 70% of the US market. They currently estimate Yowie to be sold in 10,000-12,000 stores currently.
  
  Good summary of risks also.
  
  Interesting to note they expect a Walgreens roll-out which they thought would be announced by the end of 2015. Possibly pushed back due to the new manafacturer?