Spotlight On Freedom Foods; Taps Advisor for Potential Capital Plans

Summary

• Shares of Freedom Foods Group remain in trade suspension as it continues with investigations into accounting matters, inventories, financial needs and capital position.
• Over the past years, the company has been investing heavily in its plants, capacity development and products. It continues to expect capital expenditure to decrease materially starting from FY2021.
• Media reports suggest that the company has hired Moelis to help in charting out purported capital plans, which are believed to be fully supported by deep-pocketed majority owners – Perich Family.

Freedom Foods Group Limited (ASX:FNP) is in a trading halt on ASX, which is likely to end in October this year possibly after the investigation is completed regarding inventories and financial positioning. It has perhaps made clear that backtesting will enable to unearth the extent of damage to shareholders and business.

After disclosing initial impairments to its inventory earlier this year, the company made some precipitate disclosures related to inventory, accounting and provision for bad debts. More importantly, the top executive Board members, CEO Rory Macleod and CFO Campbell Nicholas, have also resigned from the company.

Freedom Foods has engaged law firm Ashurst and PwC to advice for investigating the matters disclosed to the public. It is also backed by Perich Family who is a majority shareholder of the business.

Capital needs have peaked over the years

Over the years, the Group has been investing heavily in capacity development, new plant and capabilities and has frequently tapped investors for capital. In May last year, FNP raised $130 million to accelerate growth strategy, which also included capex in nutritional ingredients.

At Shepparton, Victoria, they invested over $170 million in plant and equipment in FY2019, adding more dairy processing capacity, nutritionals, and executed contract with a major global pharmaceutical company.

In the last few years, the management emphasised on capacity development and growth through capital expenditure, which was expected to be lower in FY20. Over the last three years to FY2018, they invested $370 million in the company, and $200 million was raised in March 2018.

In February, the company noted that full benefits of capital expenditures undertaken since March 2018 were not realised in H1 FY20. FNP also said that FY2019 was the peak of the capex cycle, and capital expenditure was expected to reduce materially.

They also anticipated that capital expenditure in FY21 would be lower than depreciation expense for the period. In May this year, they noted capital expenditure would be between $120 million to $130 million and confirmed materially lower capital expenditure in FY21.

Growth and full benefits of capital investments

Freedom Foods is likely to move extensively with new product development to utilise the maximum capacity of its plants. With more inhouse brands and products, the company could produce better margins compared to contract manufacturing, where orders have also been cancelled by its customers.

In H1FY20, its plant-based segment was significantly better-placed in terms of margin, growing sales by around 40% over the same period last year. While, its dairy and nutritional sales were up by 45% over the same period last year.

During the period, the company was launching new products from its nutritional segment. From its Integrated Nutritional Facility, it also commenced sales of products, fast-tracked further capability, and expanded Lactoferrin capacity.

It was also progressing with new product development in Cereal & Snacks business. FNP also deprioritised customer contracts to use capacity for its own brands, resulting only in a slight improvement to sales in H1 FY20.

Inventory issues and investigation

In June, the company reported that it requires to charge impairment of $35 million to its inventory, after disclosing $25 million earlier, taking total expected inventory write-off to $60 million for the year.

Earlier estimates given by the management did not include matters pertaining to cost of goods brought forward as capital item rather being included in cost of sales. It is conducting investigations into the matter.

FNP also restructured its banking facilities with bankers, securing an additional $100 million in short-term liquidity to accommodate changes in inventory and sales mix of the business. Besides, it also expected further bad debt provisions, and impact to EBITDA of negative $10 million.

Moelis appointed by the Freedom Foods

Reports are suggesting that the company has hired Moelis to assist in moving its potential capital plans. Earlier in communication to the public, FNP Board has asserted that Perich Family remains committed to investing in company.

In July, the company also appointed Scott Standen as interim Company Secretary. Mr Standen is the director of a law firm. Trevor Allen, who had become Company Secretary in June has stepped down from the position but continues to sit at the Board as a Non-executive Director.

According to reports, the company is looking for options to recapitalise the business in the wake of this crisis. With the largest shareholders already committed to deploy further funds, the capital raising may not be a problem for the company.

But a lot will depend on how the business has performed during the pandemic, its growth expectations over the near future, and a potential resumption plan of the Board. Since the Chief Executive position remains vacant, the information around a new appointment will be crucial for investors.