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Freedom Nutritional: Stock jumps 138% in a year, an attractive investing proposition

With its range of health conscious products, Freedom Nutritional Products Limited (ASX: FNP) could also be a healthy investing proposition.

Freedom Nutritional has seen its share price rise over 138% since May 2011 from 30 odd cents to 68 cents.

The company manufactures and sells a range of cereals, muesli bars, beverages such as soy milk, canned seafood, healthy chips, organic mayonnaise and biscuits all focused on consumers who are health conscious. The products contain less fat, sugar and preservatives and in many cases are nut free. Most ingredients are sourced locally from Australian producers.

This focus on healthy foods, and Australia’s growing awareness of eating healthier, has seen the company’s share price take off. Profits have been growing steadily with the company reporting net profits of $3.4m in 2010 and $4.4m in 2011.

The company did report a fall in six monthly net profit of $1.6m to December 2011, mainly due to the previous corresponding period including an abnormal gain of $3.8m, due to the sale of an investment in A2 Dairy Products Australia. Excluding that gain, net profit was up 7.3%.

Holding in A2C

Freedom also holds 27.5% of a New Zealand listed company A2 Corporation Limited (NZX: ATM). A2 Corp has a current market cap of $265m, which implies a value for Freedom’s investment of NZ$68m (around A$55m). Freedom’s current market cap is A$52.7m, which suggests that at current prices, you are getting the majority of Freedom’s business for free.

On Freedom’s balance sheet, the investment is accounted for at just $11.4m, well below the market value.

A2 Corporation appears to be growing as well, with a new milk processing facility recently commissioned in Sydney, to support the increased demand for A2 brand milk products.

Organic Growth

The company continues to grow organically, with an announcement on 30th April 2012, that it’s wholly owned business unit – Pactum Australia – is planning to build a new UHT (Ultra High Temperature) milk processing plant to meet the demands for high quality milk in domestic and international markets.

With rising incomes and improving diets, South East Asian demand for high quality, safe dairy products continues to be strong. Australian milk is well regarded in Asian markets for its consistent high quality and low production cost.

The company is also rolling out new products and trialling exports to the US.

Financials

The company has net assets per share of 52 cents, with the A2C investment recorded at book value of $11.4m (as mentioned above, market value is well above this at AUD$55m).

Freedom has also resumed and intends to continue paying dividends, with a 1 cent dividend paid in 2011 and a similar amount expected for 2012. It expects 2012 to see improved sales, profitability and return on funds employed.

One concern is the company’s debt levels. With total debt of over $21m, and a net debt to equity ratio of over 40%, it’s a bit higher than I would like, although it certainly appears manageable at this stage. The company also issued 19.4m convertible redeemable preference shares during the 2011 financial year.

Operating cash flow for the first half also raised an eyebrow, but annual reports suggest the company recovers much of its cash flow in the second half of the year.

The Foolish bottom line

If the company earns 4 cents per share this financial year, at current prices the stock is trading on a forecast P/E of 17. While that might appear high, you are basically paying for Freedom’s investment in A2C, and getting the rest of Freedom for free.  That looks like an attractive proposition to me.

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Motley Fool contributor Mike King doesn’t own shares in Freedom Nutritional Products. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691).

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