Agreed, very well done,
@MarsC.
And here we are at 19c, following a peak of $2.60 in July 2016.
There's no doubt that this industry is
cyclical, as driven by cyclicality in input costs, namely
grain prices.
In 2016, the egg-producing industry cycle peaked and commenced its descent, with grain prices increasing as the previous grain oversupply was overcome, entering a period of grain undersupply. Unfortunately for the company, FRM also experienced the added kick in the guts of the Asian Influenza outbreak and COVID-19 across the past couple of years.
Now, in 2022, I believe we are near the top of the grain prices cycle (noting the risk that the Russia-Ukraine conflict could provide further medium-term volatility), and the bottom of the egg-producer cycle. Could we be about to see another cycle in the share price?
"Analysts project that grain prices in 2022 will back off, as global supplies catch up to demand. Prices have eased since reaching highs in May 2021 but remain at levels unseen in eight years. Continued strong planting is seen as limiting how much higher grain may rise. “This crop year, we’re seeing a projected rebuild of inventory. That would suggest there’s a lid on prices,” said Jake Hanley, a senior portfolio strategist with Teucrium Trading LLC."
Source: https://www.wsj.com/articles/grain-prices-could-be-more-volatile-after-jumping-in-2021-11640543334
Capital H certainly believe so, taking a 6% stake across 2021 at an average entry price of around 30c. In a "normal" year with the cycle upbeat, the high levels of
operating leverage of this business work in reverse to what we have seen over the past couple of years and the business can produce about $4-5m in EBITDA p.a. (as shown by MarsC in the first post of this thread).
Capital H believes that this should lead to a fair valuation of around 70c in the short term ($5m EBITDA x 10 multiple = $50m EV - $11m net debt = $39m MC / 55m SOI = 71c fair value target in a "normal" year of the cycle, such as
potentially FY23).
The new strategy of shifting into
value-added products (higher margin) brings with it its own set of risks, but if executed well, could assist with further growth above the 70c target as articulated by Harley on Reach Markets, see here:
https://*.com.au/stock-farm-pride/
@MarsC, you've played this situation very well so far, I'm curious as to whether you'll now enter, under NTA, and join Capital H in riding the cycle back up?
