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3 health food companies for growth investors

Global diet trends are increasingly shifting towards organically-sourced, healthier foods. Just drop by your local supermarket to see how much shelf space is now devoted to health foods and vitamins – and that’s not to mention the independent organic health foods and sports supplements stores popping up in shopping centres everywhere. 

When Australians buy their groceries they aren’t just thinking about their waistlines anymore – they also want ‘clean’ food. Consumers want sustainably-sourced, nutritional food that isn’t overly processed or genetically modified. And this hipster trend is helping some local companies post big profits. 

Freedom Foods Group Ltd (ASX: FNP) is one company benefitting from the consumer trend towards healthy and organic food options. After hitting record highs of $5.83 in January its share price slid back to just under $5 – but this still represents an increase in value of more than 25% over the last 12 months. 

Freedom reported sales of $159.6 million for the six months ending 31 December 2017, which was a 29% increase on the prior year comparative period. The big jump was driven by double-digit sales growth across its healthy cereals and snacks brands, plant-based beverages (such as soy and almond milk), and dairy products.   

Freedom has cemented itself as Australia’s number one supermarket health food brand, growing its market share by more than 40% over 1H18. It now also has a foothold in the sports nutrition sector after acquiring the Vital Strength protein supplements brand last year. 

The outlook for the remainder of FY18 is strong, with annual sales forecast at the upper end of Freedom’s $360 million to $380 million guidance range. However, considering Freedom’s shares currently trade at a multiple of 224x earnings, this optimistic outlook already seems fully baked into the share price. Investors hoping to buy in might want to wait on more of a pullback before committing. 

Another company enjoying a welcome boost in profits due to changing diets among health-conscious Australians is Tassal Group Limited (ASX: TGR). In its first half FY18 results, Australia’s leading salmon producer reported an increase in total revenue of 23.7% on 1H17 to $271.3 million, with EBITDA up 6.1% to $56.7 million, and NPAT rising 2.4% to $28.4 million. The company was able to use these increased cash inflows to de-risk and strengthen its balance sheet position, with its ratio of net debt to equity dropping from 34.6% in 1H17 to 13%. 

While a bumper salmon harvest, increased efficiencies and effective cost management all contributed to Tassal’s strong financial performance, broader trends in Australians’ eating habits might be an even more sustainable source of longer-term growth for the company.

Tassal’s internal research – carried out in collaboration with market research firm Colmar Brunton – indicates that Australians rate salmon a healthier source of protein than other meats, and 70% of consumers would like to serve more salmon to their families. 

Similar trends in eating habits would have underpinned the strong half year results for Tassal’s key rival in the Australian salmon industry, Huon Aquaculture Group Ltd (ASX: HUO). Huon bested Tassal in revenue growth, reporting a 28% jump to $170.5 million for the half ended 31 December 2017.  

Interestingly, Huon also achieved higher average fish weight for its salmon harvest than Tassal (5.29kg v 5.11kg). Fish biomass is a key driver of increased contribution margins and makes the product more attractive to international buyers, possibly giving Huon a leg up in the lucrative Asian markets. 

Foolish takeaway

Freedom Foods is the real growth stock among these three and I think it will continue to deliver strong earnings growth over the next few years. However, at these sorts of inflated multiples it feels overpriced and I probably wouldn’t advise new investors to buy in right now. 

Of the two salmon producers it’s surprisingly Huon that impresses me more than its more established rival.

Tassal reported a strong half year result, but Huon outpaced it in revenue growth – plus its product may appeal more to international markets. 

It is worth noting that the Tasmanian salmon industry as a whole has been under a fair bit of scrutiny over the last 12 months after concerns were raised over the health of the Macquarie Harbour, a key area for salmon farming. Actions by environmental regulators could pose risks to the profits of both Tassal and Huon. More cautious investors may wish to monitor these developments before deciding on whether either company is right for their portfolio. 

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Motley Fool contributor Rhys Brock owns shares of Freedom Foods Group Limited. The Motley Fool Australia has recommended Freedom Foods Group 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 Scott Phillips.

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