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Today’s Top Picks.

Freedom Foods Group (FNP, $1.65, Mkt Cap $187M) – Plenty of healthy growth to come. TRADING BUY.

•We recently met with management of FNP after watching the stock chalk up an impressive 100% return so far in CY13 after a number of years being listed with little liquidity and high gearing holding the stock back. Key drivers for the market re-rating have included:
i. Strategic 18% shareholding ($ in the New Zealand listed A2 Corp (ATM) which has delivered solid share price growth this year;
ii. Capital raising in April to fund expansion opportunities for both Freedom and Pactum was strongly support by institutions and continues to increase the free-float of tradeable stock and dilute the Perich Family down to 60%. Three major institutions are on the register with ~17%;

iii. Guidance for FY13 upgraded on the back of continued growth in sales, profitability and new markets; and

iv. Appreciation for a strong management team that has built the business through product innovation and strong brands over the past 8-10yrs – not through overnight success!


•FNP operates in specialised niche markets of the food industry producing a mix of proprietary brands and co packed products (i.e. private labels). The appeal of operating in specialty niche markets includes: high barriers to entry, high growth and higher margins.

•The three operating divisions are: 1) Freedom Foods; 2) Speciality Seafood; & 3) Pactum Australia.

•Freedom Foods: ~40% of revenue and focus on the fast growing ‘allergen free food products’ segment which includes: cereals; breakfast and nut free snacks; and UHT milk range (almond, rice, soy). Freedom division delivered strong result 1H with Revenue and EBITDA growth of 27% and 39% respectively. EBITDA margin (13%) has seen improvement on the back of increased volumes and manufacturing efficiencies. A further $3.5m is committed to expand the Leeton capacity to 1.7m cases and support the next 2-3yr forecast growth in volumes driven by new products, new markets and private label demand. 85% of sales are currently through Woolworths and Coles; however a target of 60% has been set as new export markets in North America are established along with other new channels.

•Speciality Seafood: ~40% of group revenue for the sale premium quality Alaskan pink salmon under the Paramount brand and Sardines under the Brunswick brand in the Aus and NZ market. 90% of distribution is made through Woollies and Coles. Procurement supply arrangement with Bumble Bee Foods in North America that provides quality and supply advantages. Relatively low growth but stable business.

•Pactum: ~20% of group revenue and the only east coast contract manufacturer of UHT long-life products. Pactum services both proprietary brands from Freedom (~20% volume) and 25 private label customers (~80% volume). With the Taren Point facility approaching capacity post a $7m expansion in 2012 to support the value added segment (portion packs), a new JV has been established with Australian Consolidated Milk in Shepparton Victoria. The JV will build a new state of the art UHT packaging facility in the heart of Australia’s diary supply that will produce UHT products for both domestic and export markets. Pactum will contribute $4.5m with the new facility to supply 100m litres of capacity and a break-even of 25m litres.
Commercial operation will commence December 2013 with year 1 operations targeting 25m litres for domestic supply and growth to follow from Asian demand for export private label contracts. The business model for Pactum is attractive with gross margins at 15-20% for standard UHT products and 30-40% for value add products. Asia is seen as a huge growth market heading into 2014/15 and beyond.

•A2 Corp (ATM.NZ) shareholding (18%): FNP has held a strategic shareholding in A2 since 2007 based on a number links between the two companies from a science and product development perspective for A2 milk. A2 milk continues to build shelf space across the Australian & NZ super markets as it provides the majors with a higher margin product offering vs the low margin ‘milk wars’ going on in the standard varieties. A2 remains the fastest growing diary product in Australia with a market share of ~7%, with further growth to be supported by increasing supply capacity within Australia for both domestic and export markets. Export markets include a JV in the UK and more recently, the acceleration of an infant formula product for the Chinese market which is well documented as a market with enormous growth potential. A2 guidance for FY13 is for 36% YoY growth in revenue NZ$85m, with EBITDA margins of ~8%. ATM’s current market cap is ~A$330 valuing FNP’s holding at ~$60m. Management maintain the holding remains strategic given the growth available both in A2 milk products and infant formula market.

•In summary, while we undertake further financial analysis of the operating divisions the stock remains one for the watchlist of emerging industrials with growth potential. If you strip out the equity value of A2 it provides a EV of ~$107m and a multiple of just 7x FY14 EV/EBITDA based on broker forecasts of $16m. We would expect the stock to trade on a higher multiple as the 1HFY14 progresses and key expansion projects are completed on time to support growth in sales expected to benefit Pactum and Freedom into FY14/15. Both businesses will be leveraged for growth without the requirement of additional capex.

•We rate FNP a TRADING BUY.
http://www.fostock.com.au/announcements/freedom-foods-group-fnp-asx