Freedom Foods Group Ltd (ASX: FNP) sells seafood, dairy products, almond milk, cereals and healthy snacks mainly through its So Natural, Australia's Own and Freedom Foods brands. Like ASX-listed peers Bellamy's Australia Ltd (ASX: BAL) and a2 Milk Company Ltd (Australia) (ASX: A2M), part of Freedom Foods' strategy is targeting Chinese consumers. However, unlike Bellamy's and a2 Milk, I find it hard to tell if Freedom Foods is making much progress in its Chinese export business as I can't find a breakdown of overseas sales in its accounts.
I also don't know why shares in the company are up 1,327% in the last five years. Personally, I won't be buying Freedom Foods for the following reasons.
- In 2016 the company made an operating profit of $10.8 million, yet it has a market capitalisation of $855.3 million and $40 million of net debt.
- I suspect most revenue growth over recent years is primarily due to acquisitions, but I couldn't find a complete breakdown in the accounts. $39.4 million was spent on acquisitions in 2016.
- Gross profit margins fell from 36.2% in 2015 to 29.7% in 2016.
- Operating cash flow has fallen from $6.9 million in 2014 to $5.7 million in 2016.
- The company has paid out $9 million in dividends whilst receiving $124.6 million from capital raisings.
- Return on opening equity was just 5.8% in 2016 and equity increased significantly during the year.
- Freedom Foods is a capital intensive business. It has spent $147.9 million on property plant and equipment in the last five years.
Perhaps all of the investment made over recent years will translate into much higher profits down the line and there may be some good explanations for the above points. The problem is huge growth is required merely to justify Freedom Food's current share price and so I struggle to see value in Freedom Foods shares at current prices.
