Why Challenger Ltd likes Oliver’s Real Food Ltd

Challenger Ltd (ASX: CGF) is one of Australia’s largest asset managers with at least $73 billion of assets under management at the end of September 2017.

It makes sense for Challenger to invest for the long-term because it needs its assets to help it outperform the annuity returns that it is giving to its clients.

One of Challenger’s latest investments is Oliver’s Real Food Ltd (ASX: OLI), Challenger announced to the market that it took a 5.04% stake on 25 January 2018.

Oliver’s is seeking to shake up the fast food industry by serving food that is fresh, natural and organic. It aims to provide a healthy alternative on the roads and claims it might be the world’s first ‘certified organic fast food chain’.

There has been a big push over the past few years by various organisations and bodies for people to eat healthier. Oliver’s could be the food answer that people are looking for.

Of course, the idea is nice but as investors we need to see that the business is good and growing.

In its quarterly release last week Oliver’s revealed that cash receipts for the period were $10.5 million, resulting in net operating cash inflow for the quarter of $1.8 million, compared to $7.7 million and $5,000 respectively in the September quarter. This was a very impressive improvement in one quarter.

Year-on-year same-store sales growth was 5.7%, which was ahead of the prospectus’ forecast of 5.1%. I think this statistic is one of the best to show how popular the Oliver’s concept is with people. If growth was just coming from opening new stores it would be a less impressive growth story.

The gross margin was 75.6%, again this was ahead of the prospectus forecast. Management attributed this stronger performance to good implementation of supply chain initiatives, retail price increases and improved store management.

Three new stores were opened during the quarter, bringing the total up to 26. If another three stores are opened in the current quarter that will be store growth of more than 10% in one quarter.

Oliver’s finished the quarter with a cash balance of $2.3 million, which was an improvement of $500,000 from the September quarter. On top of that, the company sold a freehold property for $1.85 million which settled on 19 January 2018. The funds have been banked.

Foolish takeaway

What I take away from all of these numbers is that Oliver’s is at the very start of its growth journey, but its message is proving popular with consumers. A couple of years of strong like-for-like sales growth should prove the company can keep growing. It is already cashflow positive, which should allow it to expand the business organically without needing much debt. I think Oliver’s is one to watch, but it’s still early days so I’d only invest a small amount to start with.

Until Oliver’s is a bit bigger, I’d want to put most of my money into quality growth shares like these.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. 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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