TLDR: A 0 dilution, or so the headline said, recapitalization piqued my interest, but the true nature of the deal makes for grim reading.
Unprofitable, uncompetitive UHT business. $0 NTA per share, only $36 million in equity (including 35.5 million in intangibles). Plants business is the only highlight, but it's Profit doesn't come close to covering interest costs. Redemption price being 1.75 to 2.3 times face value, meaning conversion is the only feasible option.. Perich has done well to make it seem like this is non dilutionary, but has made it impossible for FNP to redeem these notes bar a miracle.
Shareholders are buying a 0 equity share on the hope it can miraculously turn around. Notes may be an interesting play for those eligible, but even those aren't without risk. Share price will be capped well below 70 with redemption price for notes set to that figure. For the risks inherent, IMO, it's hard to buy it above 30 cents. DYOR, but the growth picture is shattered, and as this saga has showed, FNP has close to 0 borrowing power, borrowing they need to keep expanding as they have, so you need to adjust those 20% growth forecast down.
Saw that this train wreck is finally due to open with a plan to recapitalize in place. The headline was interesting, fully convertible notes, so no instant dilution. This piqued my interest to see whether it would be worth a bite when it crashes 80-90% on Monday, but what is it actually worth at reopen?
Summary of Recapitalization Plan: There are 2 parts to the Recap, Notes and Options.
Convertible Notes: $265 Million Convertible, Subordinated, Secured notes redeemable by FNP (meaning to be able to be bought back) at 1.75 times face value in Yr 1 and rising to 2.3 times face value at maturity. If FNP cannot afford to buy back the notes, notes will convert at a rate of $0.7 per share. If you have $100 of notes, it will convert to 142 shares.
The Perich Family has agreed to buy $200 million, though they are willing to buy as few as $135 million, if they can convince insto/soph to buy into it too.
Note the ridiculous redemption prices, it's clear the Perich family is making a play at getting shares of FNP, as at 2.3x face value, redeeming notes would be infeasible and worse than the share dilution. So they have an easy way of hiding this guaranteed future dilution.
Assuming redemption at end of maturity, it will lead to SOI ballooning from 277m pre-halt to 805 million shares. This ignores the second section, options. Free Options: This one is straightforward. If you are a pleb who can't buy notes, tough luck, you get a free option for ever 3.2 shares you own, which is redeemable at 0.98 within the next 6 years. Nice in theory, but the odds off FNP getting to 0.98 are pretty bleak. There will be 41 million options of this sort. Total SOI will therefore be 846 million on a dilutionary basis. It's debatable if FNP can make it to 0.98 in 6 years especially with notes pricing shares at 0.7, which will create heavy downward price pressure above 0.7.
Market Cap Comparison:
Pre Halt - 277 million shares, 834 million market cap. Diluted with Notes @ 70 cents - 564 million market cap. Diluted with Notes & Options @ 98 cents - 829 million market cap.
The Business Post Recapitalization:
The business will be simplified into 2 main streams (and one for sale segment).
Seafood (for sale), Dairy and Nutritionals, and Plant Based Beverages. Considering what the geniuses at FNP recovered for cereals after sinking millions into it, I'm going to assume Seafood will have a negligible return on sale.
The only cash cow of the 3 is Plant Based Beverages. Dairy and Nutritionals is misleading, with it's core UHT business continuing to make heavy losses even when only considering EBITDA, and only helped by the high profit margin of Lactoferrin and other nutritionals. For comparison, their regional competitor Synlait made a 28 million dollar gross profit (14 million for the half year) on Lactoferrin alone. For FNP to deliver an EBITDA of just 10.5M means their non lacto-ferrin business is seriously underperforming.
Of course a business is valued by it's profitability and it's growth. So where do they stand post raising. FY21 (Estimate based on FNP Presentation)
EBITDA - 56M (being generous)
Interest Expense (Existing Debt not repaid) - 5M per annum Interest Expense (Leases) - 12M per annum Interest Expense (Notes) - 265*8.5%=23M per annum (not a cash loss, but the debt pile continues to grow and grow, hello negative equity). D&A - 26M per annum
Profit/(Loss) before tax - (10M) for FY21..
Solid business.. They really need those notes converted quick after the debt capitalization period ends at 2.5 years. Furthermore, the recapitalized business has barely 36M equity, the same as their Intangible assets.. So basically $0 NTA per share.
The End Game: The picture on conversion
It's practically impossible for the notes to be redeemed, the way they are priced. So the end game is dilution.
As calculated above, that will make SOI go to 805 million, and remove 23 million their years interest costs. This would also make the equity of the company rise to ~350M. I'd say it's improbable (though not impossible) that all 41M options will be ever a profitable conversion, so I'll ignore these.
This gives us a 564 million market cap company at 70 cents, with equity of ~350 million.
If you were very generous, you could give a 15 P/E for this FNP. So they need to make NPAT of 37.5M to be even worth 70 cents in 6 years time.
The forced dilution will reduce interest costs (though they'll need to borrow to build new plants and expand their revenue at 20% they did in the 4 years prior). With growth inevitably capped by their borrowing power due to their horrid financial condition, you really have to re-evaluate those future revenue growth forecasts of circa 20%. This is a very rough take at looking at the plan, but the odds of a recapitalized FNP making 37.5M it needs to get to a sustainable 15 P/E (@ 70 cents price) while being heavily restricted in it's growth is limited. If Perich plans to convert the notes on Day 1, things may be slightly better for growth as it would free up debt capacity (as FNP really has no access to major bank lending), but it also locks in dilution and will cap the stock price.
For a stock with major headwinds and financial risks (near 0 equity, forced dilution within 6 years, prices capped at 70cents to 1 dollars with stock overhang, loss making major segment, no borrowing power, one write off away from liquidation, 0 net tangible assets), you'd want atleast 10%+ price growth per annum. This is my opinion, and based on my analysis, but I personally wouldn't touch this stock above 30 cents with the issues it has as above that your return over 6 years to get to 70 cents is not worth the financial risk you're taking on.
It may make a good quick trade at higher prices if you are into the technicals, but on a fundamental basis, this stock is capped in potential.
Keen to hear thoughts from holders and others reacting to the recap.
FNP Price at posting:
$3.01 Sentiment: Sell Disclosure: Not Held
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