I've always been a fan of companies that operate in industries or sell products that people simply can't live without or are mandated to have. This includes our big supermarket operators Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES), some of the bigger insurers such as QBE Insurance Group Ltd (ASX: QBE) and Insurance Australia Group Limited (ASX: IAG) and perhaps some of our big four banks.
The problem is, these huge companies are slow moving, and have such huge revenues that it's difficult for them to grow meaningfully. So I've been looking for smaller companies that are providing goods that everyone needs and have bright futures. These are hard to come by, but I think there are opportunities in food suppliers, especially those that have some quirks or points of difference in the products they sell.
Based on my research, one of my favourite small caps is Freedom Foods Group Ltd (ASX: FNP). Freedom produces cereal, breakfast snacks, dairy alternative products, seafood and long life food beverages in Australia, New Zealand, Asia and the US. The company's home-grown brands include the Freedom Foods range, Crunchola, Norganic, Australia's Own, Blue Diamond and So Natural, and they also supply for a number of private label brands.
The company owns a 17.7% stake in Australia and New Zealand milk producer A2 Corp Ltd (NZE: ATM). The holding is worth over $100 million (versus a current book value of $10.4 million) and has allowed Freedom, via its subsidiary Pactum Australia, to gain an exclusive supply agreement with A2 for Australian and Asian markets.
All of these details are great, but the point worth emphasising is that the majority of Freedom's brands are targeted at consumers searching for allergen free and non-GMO goods. The proportion of Australians buying allergen free foods is growing as we all constantly strive to be healthier, and cases of gluten and dairy intolerance are becoming more frequent (this is purely based on personal observations).
Freedom offers a point of difference and as a result is seeing the rewards. After a relatively unexceptional start to the 2000's, Freedom has turned around the business in recent years and has grown revenue and profit strongly since 2010. The company also has growth opportunities in Australia, New Zealand, China and the US and has an extremely healthy balance sheet due to last year's capital raising.
Freedom has started stocking in over 2,000 health food stores in the US, and while the operations recently reported a $250,000 loss from startup operations, the company expects it to start turning a profit shortly.
Freedom also has a strategic alliance in place with Shenzhen JLL Group to provide milk products under long-standing domestic brands. This deal will boost revenue this financial year in addition to the growing market share of A2 milk and sales growth in Freedom's brands.
Foolish takeaway
Freedom has an extremely bright future; its products address a growing niche and the company is growing profits quickly. Group earnings before interest tax depreciation and amortisation grew 113% between 2012 and 2013, and grew another 64% in the last half. I expect this strong growth to continue and will buying in the coming weeks.
