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Why the Yowie Group Ltd share price is a bargain

If you’re in your 20’s or older, Yowie Group Ltd (ASX: YOW) is likely a name you’re familiar with.

Here’s something that’ll jog your memory:

Source: Yowie Group Ltd 2015 AGM Presentation

Source: Yowie Group Ltd 2015 AGM Presentation

Yowie ‘Group’ is the global rights owner to the once popular children’s confectionery that was smeared over supermarket shelves, service station checkouts and car windows, throughout Australia.

Unfortunately, weeping children and frustrated parents weren’t enough to stop Cadbury pulling the chocolates from shelves when it was unable to secure a global agreement with Yowie’s creators, Bryce Courtenay and Geoff Pike, in 2005.

It’s easy to see why Cadbury wanted to take Yowie to the global chocolate market. Launched by Cadbury in 1995; Yowie sold 65 million units in Australia within the first year.

Unwrapping a mouthful of…

Fortunately, in 2012, the Yowie brand was secured by a company called, Yowie Group Ltd, under the control of Chairman Wayne Loxton. In 2014, Loxton summed up the brand’s potential when ABC Online quoted him as saying Yowie was “one of Cadbury’s most successful brands ever launched in the history of the company”.

Bearing in mind that Australia’s population was around 18 million at the time, 65 million units is an impressive outlay for any company’s first year – it was equivalent to around 3.6 units per person at its peak, according to analysts at Canaccord Genuity. Further, Yowie is believed to have captured 30% market share from Kinder Surprise – its number one competitor.

…opportunity

Yowie Group didn’t waste any time defining the scope for the Yowie brand globally. When the company listed on the ASX through a shell company in 2012, it also moved to secure a vital agreement with Hank Whetstone, for the distribution of Yowie Chocolate in the world’s largest consumer market – the USA. The agreement allows Yowie to sell the only children’s chocolate with a toy inside.

Indeed, encapsulated toys can be a choking hazard. Therefore, the FDA granted Mr Whetsone a patent, which expires in 2019, which allows chocolates to break in a way that is safe for Children to consume. Importantly, use of the patent allows Yowie to sell its products free of competition from Kinder Surprise until 2019! Expiring in 2027, the patent is believed to cost Yowie four cents per unit sold in the USA and Mexico, plus an annual fee.

Good friends

Yowie uses Whetstone’s facility in Florida to manufacture the chocolates. The plant can extend production capacity to 100 million units, from the current 20 million units. Yowie controls the market and supply of the products to distribution partners. Various analyst research suggests break-even for Yowie is expected when the company produces and sells around 12 million units per year. Yowie estimates the market opportunity is around 700 million to 800 million units – worth more than $2 billion.

Yowie has signed distribution agreements with some of the USA’s – and indeed the world’s — leading retailers, such as Walmart, Target, Walgreens, CVS, Costco and more. Walmart, Yowie’s largest distributor and the world’s biggest retailer, recently began rolling out Yowie to 4,500 stores across the USA after some successful trials. In my opinion, that’s a glaring endorsement for the company’s product offering.

Yowie is also being rolled out in the Middle East.

Risks

Yowie is unprofitable. Its largest and most aggressive competitor is exactly that – large and aggressive. Kinder Surprise, owned by Ferraro, will hit the ground running in 2019 and will be prepared to spend big on marketing, and manufacturing capacity will come at a simple flick of a switch.

In addition to getting its product in consumers’ hands, Yowie will be required to up its manufacturing capacity rapidly (a key risk) to capture the market and keep its products relevant to young people.

Of course, the company knows this, and Yowie is creating a short feature film, recently entered an agreement to create ‘Angry Birds’ chocolates and is investing in free interactive games on its ‘Yowie World’ website and smartphone apps. Finally, cash flow isn’t yet reliable, in my opinion; however, ongoing growth in North America will likely ease my concerns.

Buy, Hold or Sell?

In June, analysts at Canaccord Genuity put a $1.63 buy target on Yowie shares. In October, Hartley’s upgraded their valuation to $1.49 (from $1.20). Today, Morgans put a $1.33 price target on Yowie shares. According to the Wall Street Journal, the average price target of Yowie shares is $1.54.

Currently, Yowie’s shares change hands at $1.17 per share, implying that the margin of safety, between the market price and intrinsic valuations estimates from the analysts, isn’t very accommodative for buyers. However, I think Yowie is worth more than all those analysts’ price targets — I believe Yowie shares are worth more than $2 each.

Therefore, I’m happy to have this high-risk investment proposition as my largest shareholding.

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Motley Fool contributor Owen Raskiewicz owns shares of Yowie Group Ltd..

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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