A brief thread on Freedom Foods $FNP.

Disclaimer: I do not have any position in FNP stock. Analysis based on publicly available info.

1/ Freedom Foods Group (ASX:FNP) is an Australian FMCG business. Stock trades at 63x P/E and is among the top performing shares on the ASX over 10 years. Long life milk accounts for 46% of EBITDA, plant-based milks 36%.

2/ Historically, $FNP was a small, low margin contract manufacturer of cereal and soy milk for Australia’s largest supermarkets. The Company made headlines briefly in 2004 when it formed a JV with Aussie Olympic legend Ian Thorpe.

3/ In 2005, the Perich family acquired a majority stake in Freedom for $21m. The Perichs were loss-making dairy farmers who had made a fortune overnight when their farmland near Sydney was re-zoned for residential in the early 2000’s.

4/ Under new control, Freedom transformed into a dairy processor focused on long life (UHT) milk. Perich-owned farms were used to supply Freedom’s operations, receiving more than $70m of disclosed milk and rental payments since 2010.

5/ While other Australian dairy processors have been decimated by a drought-induced surge in water costs, $FNP has grown revenues by winning supply contracts from its bankrupt competitors.

6/ Supermarket prices also show heavy discounting across Freedom’s proprietary branded products, including plant-based milks, with $FNP brands retailing at half the price of competitors and close to own-brand prices.

7/ Apparently, this has been a profitable strategy; in 4 years FNP’s reported EBITDA has more than tripled to $55m.

8/ But operating cash flow tells a different story. After adjusting for factoring facilities, the Company’s cumulative CFFO since 2015 has been negative $11m (vs cumulative reported EBITDA of $142m).

9/ As competitors have shuttered plants, Freedom has been building them, bankrolled by $600m+ of debt and equity raises. In just 4 years $FNP spent $589m of capex, equating to 373% of EBITDA.

10/ But of this, just 28% has reached completed tangible assets on the balance sheet. Meanwhile capital work in progress has ballooned to $340m.

11/ Freedom capitalised $72m on the construction of its Ingleburn facility, yet an independent valuation by Knight Frank valued the asset at just $41m. A state-of-the-art facility next door cost less than half the price per Sqm.

12/ Upon completion of the Ingleburn facility in 2017, Freedom transferred the asset to its controlling shareholders via a sale and leaseback, avoiding having to mark the building to market value as per accounting requirements.

13/ Ambiguous capacity disclosures for key assets suggest the facilities are behind schedule. In a 2019 presentation the company claimed Shepparton facility was at 440m litres pa. Yet annual report 4 months later appeared to revise this to 250m lpa.

14/ A lawsuit filed in December by a key franchisor claiming $FNP had not been making payments should have been a warning sign to investors. Then in May, Freedom announced that sales had under-performed even during pandemic stockpiling.

15/ Now, with CFO and CEO both resigned and an investigation into potential accounting fraud, investors wooed with promised ROIC’s of 40% are left holding half-built facilities saddled with $318m of debt, and a large amount of unsold milk.

A brief thread on Freedom Foods $FNP
@John_Hempton @RonShamgar @tommyr345 @myriamrobin @ForagerSteve