Marley Spoon

This column has been quite successful with our most recent smaller company reviews. Webster, which we suggested was a buy at $1.60 received a takeover offer of $2.0 per share, whilst iSentia is up from 25c in August to 42c today. This week we take a closer look at meal delivery app, Marley Spoon (MMM).

Who is Marley Spoon? MMM is a recipe and food deliver service. This means that the company delivers a box of fresh food, including vegetables, meat and snacks, along with a recipe to its customers on a weekly basis. It is the primary competitor to Hello Fresh in Australia. Many may of heard of Youfoodz, which is a prepared, re-heat meal deliver service, Marley Spoon is the complete opposite. It’s customer receive the exact amount of food they require and cook fresh meals using the contents of their box.

The offering has become increasingly popular with millennials and busy professionals alike as it provides a lower cost and generally healthier alternative to the options available on Uber Eats and Menu Log. With a young child, I’ve been recently converted to the recipe and meal kit delivery, buying as many as three to four meals per week. It allows my family to avoid the regular trips to the supermarket but most importantly minimise the amount of waste that typically comes from this.

The company operates across 6 different countries, including the US, UK, Belgium and Germany. It was listed in 2018 but founded in 2014 in Germany, where it is also listed. It operates in a fast growing, but incredibly competitive sector and hence regularly posts large losses. Into 2019 the company has delivered 25 million meals across the world.

What happened? 2019 has been a busy year for MMM. The company reported 54% in revenue compared to the previous year and importantly forecast that they would deliver their maiden operating profit in 2020. For a technology company just 5 years old this is a remarkable result. To add to this good news, earlier in 2019 the company announced it had entered a strategic partnership with Woolworths. The deal involves Woolworth’s investing $30m into the business and both teams working together to learn from each other. The investment means WOW will own 9% of the equity along with preference shares. On the one hand, Woolworth’s world leading supply chain will be invaluable for MMM in their fight for market share with Hello Fresh. On the other hand, Woolworth’s will gain valuable insights into the meal delivery market and if the company is particularly special, just buy them out. MMM has a market cap of just $60m.

Financials: The injection of capital from Woolworths and later Silicon Valley-based Union Square Ventures has let the company focus on improving their product and not about raising more capital. The results are already being seen by investors. Net revenue increased 55% from $39.5m to $61.4m euros, whilst active customers hit 172,000 after increasing 38%. The fastest growth is coming from the US, which saw revenue double (98%), Australia was also strong at 44% and Europe just 20%. The benefit of the business model is that it is based on repeat orders and loyalty, with 91% of revenue coming from repeat customers. The company focuses on its contribution margin, being the profit before market and administration fees, where it leads its competitors at 33% in Australia and 24% globally. This improving contribution margin has resulted in the EBIT margin, or earnings margin, reducing from a loss of 49% in 2017, to just -28% today, with the likelihood of a profit in 2020. Following the capital injection the company has limited debt but still relies on further equity raises in to continue expanding it’s business. As with most fast growing technology-based companies, the biggest expense is marketing and advertising.

Our view: The experts say you should buy shares in companies you know and understand. Having used Marley Spoon, I would have to agree. The company is one of just two real competitors in the sector in Australia and both are growing incredibly quickly. That being said, it is very much a microcap company that will rely on further capital injections to remain viable and is therefore not for everyone.

The reasoning is simple; the company provides a service that makes people’s lives easier. But it doesn’t end there. It offers people healthier and highly cost effective options that allow them to continue cooking their own meals, but in a substantially shorter time. The company is acutely aware of the huge amounts of waste that occurs in the grocery and restaurant sector and is focused on minimising this via portion control and a ‘source-to-order’ supply chain. This means they only buy enough ingredients for their current customers, no more no less. So you can eat well and feel good about your impact on reducing waste. In our view, the partnership with Union Square and Woolworths has taken Marley Spoon to another level and represents an exciting opportunity.

Gold Returns!

Our unconventional investment idea of holding physical gold in a mainstream investment portfolio is quickly becoming a very conventional idea. In recent months, gold has gained momentum, rising 20% and taking its return over the past 12 months to almost 30%. Gold is once again a front page story for many investors. Gold, as an investment asset, has enjoyed a complicated relationship with many investors and their portfolios. It’s often viewed as a ‘hedge’ against both inflation and stocks (gold tends to have an inverse relationship with the stock and property markets). In fact, during the majority of major stock market crashes gold has provided excellent returns (see table below).

Apart from the substantial geopolitical tensions currently affecting the world,  something  else more substantial has changed. Historically, many investors avoided gold, or other physical commodities, as they didn’t produce any income. Investors would compare such investments with, say, an investment in a yielding term deposit. This was fair enough, but times they have changed, and the U.S. long-term real yields have moved into negative territory as of June. As mentioned in our lead article, over a quarter of developed market sovereign debt is now negative yielding. Falling real yields have historically been highly positive for gold. When real rates are positive, there is an opportunity cost for holding non-yielding assets such as gold. But at the moment the opportunity cost is nearly zero.

If you hold cash, you’ll get one percent if you are lucky (and rates are going lower) or hold gold and have something that will make your portfolio less risky.

It isn’t just private investors that have rekindled their interest in gold, as central banks bought 224 tones of gold in Q2 2019, representing a 47% year-on-year increase. Net purchases over the past 12 months are up 85%, with the largest buyers being Poland, Russia, China and Turkey. Couple this demand with jewellery (48% of all demand) then the demand side of this asset looks very strong. The supply side has issues that is also adding to the pricing pressures.

There are many ways to get exposure to gold. There are gold miners, such as Newcrest Mining Limited (NCM) that provide a leveraged-type exposure to gold, or fund managers that select a combination of gold- related companies, or an ETF that followd an index of gold miners around the world, like NYSE Acra Gold Miners Index.

In our view, buying a company that is exposed to gold, through mining or exploring, should really be counted as an investment in your equity portfolio. In fact, the above graph shows that, over time, investing into gold equities as a whole is much worse than just buying physical gold.

While we still suggest that it is prudent for investors to include at least some gold in their portfolio, the level and percentage is  a harder question to answer, and depends on the risk profile of the individual. However, the starting point for buying gold should always be in physical bullion. For anyone that has seen a bar of gold, it is something you could quickly and easily fall in love with.

If you’re looking to buy your very own bar of gold, we would recommend the Perth Mint.  The  Perth  Mint has a range of services, from buying a bar of gold to take it home and store under your bed, to a buying and holding service (for a small fee of course). The Perth Mint provides a government guarantee that all their gold is 99.99% pure.

However, the easiest way for the average investor to gain exposure to the yellow metal is through Exchange Traded Funds (or ETFs). A gold ETF represents a share in a store of physical bullion, often held in a bank vault or other secure location. If the gold price appreciates, your share in the ETF should also appreciate, as the holding becomes more expensive.

 

There are two major options for Australian investors who want to pursue this avenue on the ASX. The ETFS Physical Gold ETF (ASX: GOLD) is the largest gold ETF traded in Australia and represents 358,600 ounces of physical gold held in the London bank vaults of HSBC. It charges a management fee of 0.40% annually for storage and other costs.

Like many international commodities, gold is universally traded in US dollars, which means that for Australians, the price we can buy gold at is affected by the gold spot price as well as the price of our dollar relative to the greenback (we have to buy US dollars in order to buy gold). This adds a layer of complexity and volatility that our American friends don’t need to experience. The BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU) is another option for those who would like to take the currency risks out of the equation. This ETF also stores physical gold in a London bank vault (owned by JPMorgan), but actively hedges against currency movements between the US and Aussie dollars, to give a “purer exposure” to the gold price. This comes at a cost however, with QAU charging a higher fee of 0.59%.

Gold is an easily understood investment, and a true diversifier. These two ETFs make it easy to buy and sell, and to hedge or unhedge your currency exposure to gold. With the alternative of holding a yield cash deposit more or less disappearing, we encourage investors to consider their exposure to gold, more than ever.

 

Market

‘Forecasting is the art of saying what will happen, and then explaining why it didn’t’

We didn’t think the final quarter of the financial year could be explained any better than through this quote. Throughout the period we were provided with  further   evidence as to why both opinion polls and economic forecasters should be given little heed and why it’s important that investors do not adjust their investment approach before an ‘expected’ or ‘guaranteed’ event occurs. The most obvious case in point was the Coalition election victory in May, which polls suggested was unwinnable, but eventually saw sectors ranging from infrastructure to private health insurers, the banks and hospital operators rallying on the back of a status quo government.

In the lead up to the election the noise in the media and throughout the financial industry was immense. Our office seemed to be a revolving door of investment managers selling listed investment companies investing into high yield (and high risk) debt, property development or unrated corporate bonds as alternatives to high yielding shares. As you would have noticed, not one of these ‘unique’ opportunities was of sufficient quality to meet our due diligence process, yet most have seemed to have raised hundreds of millions of dollars without us. We aren’t sure what their investors are thinking now, with many trading at a discount to the value of their portfolio and high yielding Australian equities having delivered the strongest return of all markets around the world for the first half of 2019.

As we outlined in previous issues of UWJ, the additional yield provided by franking credits either in the form of a refund or tax saving, could not easily be replaced without moving further up  the  risk scale. On this basis and given the growing concern throughout the country about this and several other proposed tax policy changes, we did not believe it was prudent for clients to sell down higher yielding (but more importantly high quality) companies solely because they wouldn’t provide the same income as before. The market reaction the day after the election was telling, with most banks up in excess of 5% and now signs that the property sector may be recovering.

The failed predictions continued  in the forecasting of interest rates, with the majority of economist calls made as recently as a few months ago proven wrong as the RBA elected to hold rates in May and then eventually cut in June. This comes just 12 months after most experts were predicting rate hikes to occur amidst a booming global economy. All these events do is solidify the central tenet of our approach to investing your capital, which is to invest for many scenarios, and not assume the expected will happen. In fact, we know that as investors you will need to do with the unexpected occurring regularly.

Worried about growth

There were some concerning signs creeping into the market in the June quarter which suggest to us that there may be a little too much money floating around the ASX. Whilst merger and acquisition levels are not at pre-GFC levels, management and boards appear to be chasing growth at any cost in looking at what appear to be purchases and investments in non-core businesses. There were several cases in point, the first being Wesfarmer’s sudden decision to seek investments in the growing but speculative rare earths and battery industry and secondly, AGL Energy’s decision to lodge a big for Vocus Telecommunications (only to withdraw the bid within    a few weeks). Then there was the continued push into private equity and takeover activity by the industry fund sector who are increasingly concerned about the outlook for growth.

We admit that we fall on the conservative side of investing and find it difficult to justify investments in loss making companies trading at astronomic multiples. It has been these companies that seem to defy gravity and have been leading the broader index higher. Yet Australian companies have a chequered history of pursuing growth through acquisitions, with our largest miners a case study in how to buy assets  at the top of the market. We also have a track record for our ‘growth’ companies to be valued at 2 to 3 times what a more sophisticated market like the US values similar companies. It is at times like this that we stress the importance of sticking to your investment policy and not capitulating to momentum or positive sentiment.

Our approach has and will always be predicated on Bucket allocation, particularly ensuring your portfolio holds sufficient Capital Stable assets to withstand an extended  period of market weakness. Further, we seek to ensure your portfolio is constructed of high-quality assets, trading at reasonable multiples or valuations and which offer exposure to the most important themes occurring around the world. At times our recommendations may seem contrarian, or unwilling to embrace the most popular themes, this is because we are seeking to deliver consistent returns over the long-term rather than chase risky short-term gains.

Markets

The US-China Trade War was the primary driver of volatility during the beginning of the quarter. It was then the Federal Reserve and other global central banks that took the reins and pushed both bond markets and sharemarkets around the world to all-time highs and lows. It is that interesting paradox where the outlook for the global economy is sufficiently weak to warrant cuts to global interest rates and continued stimulus, yet sharemarkets continue to move towards multi-year highs with little concern for corporate profits. Perhaps this is why gold bullion has delivered one of the strongest returns over the last two years.

In the table above we have provided a summary of the major investment indices for the quarter and financial year:

As you can see, the highlights were the Australian and US markets which delivered the strongest financial year returns after continuing to rebound in the final quarter. The European and Chinese markets showed signs of recovery but remain well behind due to the continued political impasse and trickledown impacts of slowing Chinese imports. The table provides an interesting insight into the why the first six months of 2019 have seen the fastest growth in over 20 years, a core reason being the heavy sell- down experienced at the end of 2018 which means financial year results are well below those levels.

Outlook

At this point the global economy and sharemarkets are in unfamiliar territory. One of the most important inputs or factors that must be considered when making investment decisions for today  and for the next 10 years is where you expect interest rates to move throughout this period. It is interest and bond  rates  that  determine the availability of debt to fund investments, the return  required  to warrant further investment in Risk assets like shares and the pain that comes with continuing to hold excess funds in cash. It is this pain that tends to send sharemarkets higher as investors need to do something with their capital.

If you believe interest rates  will  fall further over the next decade,  or at least remain at all-time lows, than an aggressive investment approach targeting higher yielding investments would be warranted. Falling interest rates would suggest assets like property, infrastructure, Government bonds and utilities will increase further in value. Increasing interest rates suggest a more inflationary and higher growth environment, in which case cyclical business-like mining, materials, those facing consumers and even gold bullion will benefit, and the likes of property and utilities will struggle.

Increasing interest rates will lead to lower valuations of most assets and businesses around the world but particularly those whose incomes have already been couponised. Looking short term, however, we believe there remains substantial further downside in rates as some of the world’s overleveraged developed economies, like Australia, come to terms with  a  slowdown in  global  growth.  The  result  is   a portfolio that is positioned for both events to occur  and  a plan to navigate this unfamiliar period whilst keeping your capital intact.

The Walt Disney Co.

For a change of pace, this month we take a look at, in our view, one of the most interesting media companies in the world. Disney, or The Walt Disney Company is known throughout the world for its theme parks and children’s cartoons. Yet the company is so much more than that in 2019. Disney may be the most important media company in the world given its ownership of leading brands, dominant position as a content provider and global scale.

Businesses

Disney’s businesses are extremely diverse and include both traditional and modern networks including sports broadcaster, ESPN, ABC, FX and the Disney Channel. They also own a growing portfolio of Walt Disney theme parks and more recently cruise ships that offer families a unique holiday experience. Disney’s recent strength, however, has been in their Studio Entertainment division through which they identified the true value in the video-on-demand would be owning content rather than platforms. It is this unit that owns both the traditional Walt Disney studios, which includes movies like the Lion King and Aladdin, as well as the two most dominant franchise of all-time, being Marvel Studio’s and Lucasfilm. For the uninitiated, Marvel owns the content and has delivered several dozen super hero movies including the Avengers, Thor and Guardian’s of the Galaxy, whilst Lucas Film controls the all-time Stars Wars and Indiana Jones’ franchises. Finally, the company recently completed the acquisition of Twentieth Century Fox from News Corporation further extending their dominance. More recently, Marvel have announced an expansion to deliver their contact directly to consumers, similar to Netflix, with the global launch of both a Disney+ and ESPN+ streaming service just around the corner.

Financials

The company has been riding a wave of record revenue on the back of titles including this years Avenger’s: End Game topping the all-time list for ticket sales. The fourth quarter of 2019 was no exception with revenue of $20.25bn (up from $15.2bn) however the resulting earnings per share was impacted by the Fox acquisition, falling from $1.87 to just $1.35 this year. Management blamed the underperform of Fox Studio’s which can be taste driven and many years in the making for the earnings reduction of 0.60 cents per share compared to 0.35c expected. The release of Avengers and Toy Story 4 were not enough to offset the disaster that was XMEN: Dark Phoenix. Disney’s largest segment is however their television networks and theme parks which added revenue of $6.71bn and $6.58bn after years of capital expenditure adding new themes including a dedicated Star Wars park.

Outlook

Disney’s only loss-making business, it’s direct-to-consumer streaming services offer the greatest potential in our view. The company recently acquired the popular Hulu streaming platform and is in the process of launching a dedicated sports streaming service, ESPN+, around the world as well as taking back control of their historic content database and launching a Disney+ TV and move subscription platform. This comes at an interesting time for the industry with many consumers now rationalising their subscriptions in light of diluting quality. The fact in Disney’s favour, however, is that they own two of the most valuable commodities in media. The first being live sports that consistently attracts strong advertising revenues and which is only becoming more popular. And the second is the quality of content and the ability to leverage this not into movies but into TV shows, theme parks, products and experiences. We understand ESPN is about to begin renegotiating its position with various cable TV providers and given its importance as an anchor to these services will result in better than forecast sales.

Given the potential growth and market position you would expect Disney to trade at a substantial premium to market, yet it’s historical P/E is only around 21 times earnings even with the stock up 24% this financial year. Much cheaper than the 90x hat Netflix trades on.  It offers a yield of 1.3% and has aggressively been buying back stock at every opportunity.

Costa Group Holdings (CGC)

We may be wired differently to the rest, but when we see companies fall by 20% or more in a day out interest is automatically piqued. Whether it is the need to search for a discount, or something contrarian in our blood, we tend to see value in these ‘fallen angels’. And with interest rates at an all-time low, markets and most importantly individual companies trading at stretched valuations, there seem to be more and more of these every month.

This week a client reached out and put some very simple words forward, being that the basis of education relating to economics and financial markets is still reliant on the ‘rational man’ concept. That being markets will react rationally and price in all relevant information at all times. Yet anyone who has been involved in investing at any time over the last 100 years knows this is simply not the case, investing is an inherently emotional pursuit and these emotions regularly result in mis-pricings.

This month we were surprised at the reaction to Costa Group’s earnings downgrade and weaker outlook for its many markets, with the share price falling 25% and reaching multi year lows.

Who is Costa Group?

Costa is Australia’s leader grower, packer and marketer of fresh fruit and vegetables with five core business lines: berries, mushrooms, tomatoes, avocados and citrus fruit. In fact, it is the number one producer of blueberries, raspberries, mushrooms, glass house tomatoes and citrus in Australia. That is some sort of monopoly.

Costa was traditionally reliant on the production of berries and citrus but post it’s listing in 2015 the company has invested substantially to diversify its earnings base, as has been seen in the revenue chart below:

The Costa business model is based around having a 52 week production cycle and diversifying its earnings base sufficiently to ensure a poor season for one type of fruit does not impact the business as a whole. This has been extended to overseas investments including Morocco and China, the produce from which is delivered directly into Europe and China respectively. This is going someway to remove the reliance on the major supermarkets who purchase 75% of Costa’s production.

So, what happened?

Anyone who shops at Woolworths or enjoys some blueberries on their morning muesli would have seen it coming. The price of both blueberries and avocados in 2018 dropped substantially selling for as little as a few dollars a punnet, and that was only the start of the problems for Costa.

The company was hit by a quadruple shock, with poor weather in Morocco resulting in its production being sold into Europe at the peak of supply, meaning lower prices were received. Next, the Australian mushrooms experienced an unseasonably warm growing season and the expanded growing centre was still waiting for commissioning which impacted production. Then raspberries were impacted by poor quality and fruit flies were detected in their citrus plantations. It couldn’t get much worse.

Yet it was still a shock when the company reiterated its previous guidance at the end of May and investors capitulated. The company confirmed that revenue was down 2.4% and EBITDA would fall 42% to $35.3m for the financial year. They indicated that the results for the full calendar year of 2019 would be in line with the previous year but below previous expectations due to the combination of events listed above. However, they clearly indicated that avocados, tomatoes and blueberries had not been impacted, which represent a majority of their revenue base.

Our view

We think Costa is a case in point as to why agricultural and food production companies have had such a difficult time on the ASX and in other listed markets. Costa is an example of a high-quality company, with great long-term assets and production schedule, but which became overvalued due to the exuberance of short-term investors. The company operates in a weather dependent industry, therefore, poor seasons will occur regularly and the companies annual profits will be volatile. This appears to have been misunderstood by the market.

As a smaller company, valued at $1.3bn we think Costa has some merit. The company is nearing the end of a significant capital expenditure cycle, having upgraded and planted out more of its core blueberry, mushroom and tomato plantations, costing some $200m. It continues to derive strong margins of around 14% from these business lines and delivers leverage thanks to its fixed lease agreements for the underlying properties.

We believe the various issues are cyclical and simply part of owning an agricultural company. Management have done a lot of work to diversify the business which will hold them in good stead moving forward. The company currently trades on a forward price earnings ratio of just 16x, which is a discount to most Australian food companies and most importantly much lower than global beers like Calavo Growers (25x) and Scales (18x).

Webster’s Ltd

With Australia’s water markets an election issue, we would be remiss not to provide an update and our view on one of Australia’s largest water rights owners, Webster’s Ltd (WBA). WBA is the combined Tandou entity, chaired by one of Australia’s most experienced business people, in Chris Corrigan, who stepped down from the booming Qube Holdings group to focus on this sector.

At last report, WBA holds just over 150k mega litres of water rights across the eastern Seaboard, but primarily in the Murray Darling Basin; noted by James Dunn as Australia’s largest water region. The group has operations across the east of Australia, including Tasmania, with around 20,000 irrigable hectares of property at any one time under management or ownership.  The groups biggest crops are in cotton, walnuts and almonds, with livestock including lambs a growing share of their business. The company has the ability to produce as much as 180,000 bales of cotton each year and currently delivers 90% of Australia’s annual walnut crop (that’s some sort of monopoly). Yet by far the company’s largest asset is it’s substantial water rights holdings which are carried at a book value of $162m on their balance sheet but which many experts believe are worth in excess of $350m at the present time. Given WBA’s market capitalisation is just $545m, the horticultural and agricultural assets nearly come for free to shareholders.

WBA was caught up in a 4 Corners report in 2017 which made allegations regarding the company’s water use, ownership and intentions following the purchase of the Tandou cotton farming properties in NSW and the associated water rights. Such was the coverage of the report that management saw fit to put out a press release, highlighting in their words ‘fabrications’ and lack of research undertaken in this ‘hack job’ by the ABC. Effectively, the reporters and several land owners were suggesting that Webster’s had breached various obligations regarding its use, storage and ownership of water. The company stands by its stated goal, which is to ‘own a wide range of water entitlements……and convert these entitlements into more valuable horticultural and agricultural products’.

WBA is coming to the close of a period of transition, which began when the company decommissioned the cotton farm operations at Tandou, due to concerns about the availability of water from the Menindee system, and converted the property to livestock farming of lambs.

The group also sold another cotton farming property, Bengerang, for $132m in 2018, to a series of private investors and pension funds. This and more recent decisions to purchase further almond and walnut orchards in the Riverina district in NSW has seen the company sharpen it’s focus on the region where they have the greatest competitive advantage. For the 12 months ending 30 September 2018, the company remains reliant on the Agricultural division, which included cotton, wheat and livestock, for $153m in revenue and $43m in profit, and the Horticultural division delivering $53m and $10m in profit respectively. Unfortunately, comparisons to previous years offer little value to the substantial land sales and change of strategic direction that have occurred.

Whilst some may question the best use of limited water in Australia, there is no doubt that cotton, almonds and walnuts offer some of the great return on investment for farmers particularly in export markets. The walnut orchards alone deliver a profit margin of around 20%, with WBA delivering the second highest yields on record in 2018 and selling prices increasing 17% globally. As with all agricultural businesses, there was some weakness in the 2018 crop due to non-pollination events, however, management’s recent decision to divest a number of non-core properties has allowed them to continue to invest in further plantings, as well as purchase additional and surrounding properties. The company’s walnut operations, which are vertically integrated, are one of the few Australian monopolies still available to investors to take part in.

Where many agricultural investors go wrong, is in over-leveraging their business and not maintaining sufficient diversification of their income. WBA is well placed on both areas, first, their gearing ration is just 28.5% after using the sale proceeds to reduce debt, and secondly, their income is spread across annual crops, like cotton, and perennial crops like walnuts and almonds, which once producing provide a consistent income. This has more recently been complemented by a move to increased livestock capabilities following the purchase of 50,000 hectare property for lambs at Backpaddle. Following the recent transactions, PSP Investments, a global pension fund, own some 19% of the property, and Chris Corrigan himself 13%; this provides important support for further capital raisings and asset purchases.

Overall view

In our view, the change in direction of WBA comes at an opportune time and offers an excellent entry point for investors. The company trades expensively on a Price-Earnings ratio of 30x, however, this is muddied by the combination of a transition year for the company’s finances and the fact that some 60% of the company’s shares are owned by insiders. Continued improvement in 2018-19 operations, which have been highlighted by management should see earnings grow strongly in the years to come.

We believe some level of valuation premium is reasonable given the monopoly position in walnuts and the large water, relatively high security, water entitlements. Outside of BlueSky’s Water Fund, which trades at NTA but offers limited liquidity, WBA is one of the few true water investments left in Australia. We believe the company will continue on its expansion into perennial crops where is has a competitive advantage and is likely to do through further capital raisings. The strategy being undertaken is not unlike that of Harvard Endowment, which has spent many years buying up pristine Napa Valley property in order to take ownership of the water located underneath. For this reason, we would not be surprised to see further pension fund interest in the company’s assets. Given Qube Holdings strong turnaround, we would not expect someone like Chris Corrigan to walk away to waste time in WBA unless he sees real opportunity in the sector.

It’s a buy for us.

Long Table – LON (ASX)

We’ve all tucked into an expensive, yet incredibly delicious Maggie Beer ice cream before, and there is no doubt we have all had our share of smashed avocado with a flat white in one  of Melbourne and Sydney’s many respected cafes. Well, an investment in Long Table may offer a chance to profit from these trends.

Long Table has been around for some time, but is only just coming into its own as a ‘House of Brands’. The company is well known for being the 48% owners of the Maggie Beer brand, and recently agreed to purchase the remaining 52% for just $10m as it seeks to ramp up its sales growth. Long Table also owns a number of little- known, but growing brands including Saint David Dairy, which is a micro-dairy based in Fitzroy, Melbourne, and Paris Creek Farms, a bio-dynamic, organic dairy in South Australia. Through these acquisitions and business lines the company has delivered a near fully vertically integrated business model.

Leading the charge is  Laura  McBain, who left her lucrative position as CEO of Bellamy’s Australia, the infant formula producer, to run this fledgling company. Laura is well connected to the Tasmanian agricultural scene and the fact that someone of her experience and stature, not to mention the pay cut, would join a small company like Long Table, bodes well for the future.

As with Webster’s, the company is coming to the end of a period of transition after it appears too little attention was placed on the efficient operation and distribution of the Maggie Beer brand. Maggie Beer’s long-established career offers Long Table the ability to leverage off the respect she has in the public and industry, and the high quality synonymous with her name. The Maggie Beer brand spans various products, focused around home entertainment, including pate’s, pastes, jams, ice cream, and more recently cheese. Interestingly, Maggie’s recent book, a ‘Recipe for Life’, offers recipes that can help reduce the risk of dementia, and are likely to form part of an eat-at-home line to be offered by Long Table in the future.

Alongside Maggie Beer, is Saint David Dairy, located on St David Street in Fitzroy, Melbourne. The area is the heart of hipsters and the branding could not be more authentic. There is a proven trend that hipsters are willing to pay more for authentic products, and the business has been focused on supplying award winner butters, milks and yoghurts to Australian restaurants and independents for some time. Whilst only a small part of the business, the sector and revenue is growing (up 31% in the first half to $3.6m) via the corporate support of the Long Table Group. The gross margin is also strong at 61%. The final business is Paris Creek Farms, located in Meadows and producing a series of milk, yoghurt and cheese for the domestic market. As with  Saint  David,  the  brand is authentic, local and organic, branded ‘food for purists’, as management seek to capitalise on restaurants need to identify the source of their products and consumers wish to support smaller businesses. The company saw revenue fall 6% in the first half, delivered a gross margin of 42% and a loss of $1.8m as they reset their pricing across Australia.

The first half of the 2019 financial year has been a difficult one, involving a great deal of consolidation and corporate activity. Saint David was acquired during this period, Paris Creek was re-branded, and the Maggie Beer purchase was finalised. The highlights came from Paris Creek, which now supplies over 500 stores and has began a rollout with Metcash, whilst Maggie Beer sales are expected to deliver earnings of at least $1.7 to $1.9m. The company announced a $13m capital raise to fund the Maggie Beer acquisition, with only $4.0m being raised placing pressure on the business in the short-term. For the first half Group Revenue was $23.1m, with $11.5m coming from Maggie Beer and $8.0m from Paris Creek. The former produced a profit of $1.482m, the latter a loss of $1.802m and St David $692k.

Whilst the results were not particularly great given the period of transition, the opportunities are substantial  with  a  lot of low hanging fruit available to an astute management team. With 100% of Maggie Beer now owned, management  have  been able to create efficiencies by having these products produced by Paris Farms, reducing input and staff costs substantially. They have also integrated the Maggie Beer sales team into the business who will now expand their product line to include both the other key brands. The Paris Creek brand struggled somewhat due to an ill- fated decision to offer non-standard milk and yoghurt lines, which added cost to production and confused consumers; this has since been rectified. St David, which remains possibly, is also entering a ramp up phase,  with   management   looking   at expansion opportunities in Sydney and expanding their reach of independent stores and cafes and introducing a number of non-milk-based products, like almond and soy, which are part of an incredibly fast growing market.

Overall view

At a market cap of just $35m, an investment in Long Table isn’t for everyone, however, it may offer great returns for those willing to be patient. The company is well capitalised with trade payables of just $4.4m, however Good Will from the purchase of Maggie Beer represents one of the largest assets   at $41m. An investment in Long Table at this point is a bet that the company can ramp up both sales and margins on under  a more professional and experienced management team; with the odds likely in your favour. Given the size of the company, we would expect further capital raisings to be announced as further acquisitions are identified, with a improved cost control likely to see the losses turn into gains sooner rather than later.

The company’s high-quality products, which claim to be Barista approved, are positioned to give the discerning Millennial consumer with the warm feeling that they know the cows producing their milk are happy, or which farms they are supporting. An expansion into non-dairy products, like almond and soy milk, exposes the company to a fast-growing sector that should add to returns. Whilst it may be a while down the road before the company rewards shareholders, it’s a very interesting speculative opportunity  in  the  midst  of  a turnaround.