What we want to see from our investment in FOD during 2022
1st Feb 2022
This investment memo is a short, high level summary of why we continue to hold FOD and what we expect the company to deliver in 2022. The purpose is to record our current thinking as a benchmark to assess the company’s performance against our expectations 12 months from now.
What does FOD do?
The Food Revolution Group (ASX:FOD) is a beverage manufacturing company that specialises in premium fruit juices and probiotic wellness shots. It owns established beverage brands ‘Juice Labs’ and ‘Original Black Label’ and its products are available in major supermarkets Coles and Woolworths generating revenue for the company.
What is the macro theme?
As Australian consumers become more health conscious, their grocery preferences are shifting towards natural and locally sourced products.
Why do we continue to hold?
Consolidated Growth for New Products
After launching two new beverage products in 2021 (carbonated cans and probiotic wellness shots), we want to see whether consumers are buying these new products and whether those sales translate into meaningful revenues for the company.
Currently distributing through Coles and Woolworths, with very little marketing spend, we think that there is a large scope to grow revenues through marketing and distribution which was not a focus for FOD in 2021.
Turnaround Progressing
In 2021 FOD became EBITDA positive. We are watching the turnaround story play out and want to see if the company can string together a number of strong quarters of growth and financial performance to establish itself as a strong candidate for institutional investors.
Turnarounds can take time, and are ideal for patient investors. We want to give FOD multiple years to see its Fix → Reset → Growth strategy play out.
What do we want to see in 2022?
Objective #1: A sustained strong financial performance in 2022.
For FOD we want to see multiple quarters of positive EBITDA and operating cash flow positive. We want to see the debt drawdown and will be disappointed if the company raises capital to fund its current operations.
Objective #2: Consolidate the growth of newly launched products
We want to see sales growth for the new products launched in 2021 (carbonated cans, probiotic wellness shots and apple juice) and increase distribution channels for these products.
Objective #3:New products and innovations
We want new products developed and on shelves for customers to enjoy. New products, that are successful should improve FOD’s ability to generate cash and improve its business.
What could go wrong?
Debt Risk: FOD has $5.9M of debt, and although its debt was refinanced to NAB (tier 1 bank) in 2021, debt repayments can hamper the growth of the company – as cash flow that could be re-directed towards growth goes into paying off the debit facility.
Competition Risk: The FMCG space is very competitive and there is no assurance that FOD’s products will resonate with consumers once the demand from the ‘new product launch’ subsides.
Key Distributor Risk: As FOD’s only distribution channels, if Coles and Woolworths decide not to stock FOD’s products, it will impact the company’s ability to make sales.
What is our investment plan?
We originally invested in FOD at 3.5c because we believed the stock was on the cusp of a turnaround and believed FOD’s processing facility, brand value and current distribution network alone is worth multiples of the current market cap.
With the stock trading below 2c and well below our entry price, we will continue to hold our full position during 2022 in the expectation of a share price re-rate on the company achieving objectives #1, #2 and #3.
Disclosure: The authors of this article and owners of Wise-Owl, S3 Consortium Pty Ltd, and associated entities, own 7,857,143 FOD shares at the time of writing this investment memo. S3 Consortium Pty Ltd has been engaged by FOD to share our commentary on the progress of our investment in FOD over time.
✅ Initial Investment: 3.5c 🔲 Increase Position 1 🔲 Increase Position 2 🔲 Share Price Increase 250% 🔲 Share Price Increase 500% 🔲 Share Price Increase 1000% 🔲 12 Months Capital Gains Discount 🔲 Free Carry
🔲 Take Profit
🔲 Hold remaining position for 3+ years
“Expected Company Milestones” are based on the company’s publicly available execution plan and some assumptions made by our team on potential announcements that should de-risk the investment. “Our investment milestones” show our current long-term investment plan. Early stage investments are risky and there is no guarantee that the expected events will occur. The lists are not in sequential order.
Investment Milestones for FOD
✅ Initial Investment: @3.5c
🔲 Top Slice
🔲 Free Carry
🔲 Take Profit
🔲 Price increases 300% from initial entry
🔲 Price increases 500% from initial entry
🔲 Price increases 1000% from initial entry
✅ 12 Month Capital Gain Discount
🔲 Hold remaining Position for next 2+ years
Why We Invested
The Brands
Reduced Costs
Consumer Preference for Natural Products
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New Product Launch 3 (2022)
