This ASX Turnaround Story is about to be Discovered
The latest addition to our investment portfolio is an emerging turn-around story on the ASX that is already 12 months in progress - but the broader market hasn’t noticed... yet.
The biggest returns we have ever made are investing in company turn-arounds.
We have been watching this company closely over recent months and have just decided to make an investment.
The company is ASX:FOD - a food and beverage manufacturing company specialising in innovative health-focused products.
FOD is 12 months into a turn-around under an experienced new CEO and has just released highly encouraging financials...
We have invested in FOD at 3.5c.
We intend to hold this new investment in FOD for the long term, and today’s research report will explain our reasoning.
Our recent track record as at February 17th 2021:
- Vulcan Energy Resources at 36c now up 1,967%
- Elixir Energy at 3.6c now up 372%
- WhiteHawk at 5.8c now up 538%
- Euro Manganese at 20.5c now up 205%
And last week we added European Metals Holdings at $1.40 - already up as high as 17.8% .
So what do we look for in a turn-around investment?
A turn-around investment is when a new management team takes over an underperforming business and "turns it around" to become hugely successful for themselves and shareholders.
Here is what we look for in an ASX turn-around:
- an established company,
- a very valuable business/asset,
- previous management didn’t maximise value,
- the share price is languishing,
- new management has arrived and shown some early success, and;
- the market hasn’t caught on yet...
Before a turn-around starts, long time shareholders become frustrated and impatient, selling their shares and increasing pressure on the already punished share price.
How to turn it around?
Bring in high calibre new management with performance shares and the company share price can re-rate surprisingly quickly once the broader market catches on.
Especially if the company delivers improving financial results under the new management team - like our new investment FOD just did a week ago.
As the global share market switches from speculation to value investing in the current bull cycle, we think "turn-arounds" are going to be the biggest winners, and are investing in this theme with a 4 to 7 year hold horizon.
Our New Turn-Around Investment
The Food Revolution Group (ASX: FOD) is a food and beverage manufacturing company, specialising in the development of innovative health-focused products including beverages, functional foods, nutraceuticals, and wellness supplements.
But because FOD’s precious management didn’t really know how to land deals with large retailers, secure fruit supply or effectively drive cost efficiencies - the FOD share price has been falling in a hot market as impatient investors rush off to chase shiny new opportunities.
Until now, this put selling pressure on the FOD share price which offered an opportunity for fresh new investors like us.
Here is what FOD had when we first looked at the company a few months ago:
- Revenue - $17.9M, but running at a loss of $1.72M,
- Distribution - Deals with major retailers like Coles, Woolworths, IGA (via wholesaler Metcash),
- Processing facilities at Mill Park in Victoria, including a 1,260 sqm state of the art clean room with laboratory, power and liquid mix capabilities, and;
- A well known brand (you probably would have seen on supermarket shelves).
Here are the reasons why the FOD share price has been languishing:
- Bushfires and drought temporarily increased fruit prices and reduced supply;
- Financials - good revenue but always showing a loss;
- Corporate issues with an investment tranche were causing uncertainty, and;
- Previous management was not delivering.
Despite FOD’s assets, legacy issues pushed FOD shares to as low as 2.6c last week - this is a $20M market cap - we think this is very undervalued.
We believe FOD's processing facility, brand value and current distribution network alone is worth multiples of the current market cap. We took a position at 3.5c a couple of weeks ago.
April 2020: Enter new CEO Tony Rowlinson - When the turn-around began
Tony joined FOD in April 2020 and has been working hard to turn things around - with the results starting to show in the latest financials.
We’ve spent 5 months researching FOD and getting to know Tony after he joined to turn around FOD.
FOD’s goal is "To be a leading provider of beverages, nutraceuticals, functional foods and wellness supplements, that improve the quality of consumers lives, by the use of all natural ingredients."
FOD just released their financials after 12 months with Tony at the helm, and we were impressed enough to make a long term investment (4 to 7 years) based on these early signs of success.
Revenue is up and the company is now at break even - that's a tick in the box for part one of Tony’s turn-around.
What else has Tony achieved in 12 months at FOD:
- Negotiations with large retailers - Increased prices of flagship juice brand,
- Reduced costs - negotiated fruit supply agreements,
- Built leadership team,
- Launched new brands, and;
- Launched new strategy.
After seeing Tony deliver on his first few goals we now believe he will continue to deliver on the rest of the long term strategy.
We have made our investment in FOD at 3.5c with a 4 to 7 year horizon - our next step is to visit the juice factory and see where it all happens. We will cover our findings in an updated research report in the coming weeks.
General Information Only
S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.
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