Australians are becoming more health-conscious than ever, with reality cooking and weight loss TV shows putting healthy eating front and centre in the popular consciousness. Plus the hipster movement is making organic and sustainably-sourced foods the diet of choice for the modern Australian.
These dietary trends are starting to translate into real profits for two of Australia’s leading food companies: health food supplier Freedom Foods Group Ltd (ASX:FNP), and fruit and vegetable producer Costa Group Holdings Ltd (ASX:CGC). But which of the two companies represents the best value for money right now?
Freedom Foods is a diversified health food company producing cereals, dairy, plant-based beverages such as soy and almond milks, and even seafood. It has now grown into Australia’s leading supermarket health food brand, growing its market share by 40% over the first half of FY18. It also has a foothold in the sports nutrition sector after acquiring the Vital Strength sports supplements brand last year, as well as entering into an exclusive distribution agreement with Crankt Protein.
Freedom is now seeking to expand its geographical footprint into Asia and North America, with its confident outlook based on strong forward demand for its dairy, plant and cereal products.
Freedom Foods posted strong results for the first half of FY18. Revenues were up 29% on the prior corresponding period to $159.6 million, while operating EBITDA was up 28% to $16 million. Outlook for the remainder of FY18 is strong, with Freedom Foods forecasting annual sales at the upper end of its $360 million to $380 million guidance range.
The price of shares in Freedom has continued to rise – up about 10% in the last month alone. Even a recent equity capital raising, which was completed in early April, did little to dilute the Freedom Foods share price. They now trade at about 260x earnings, making them difficult to recommend at current prices, even despite the company’s strong growth prospects.
Costa Group is the largest supplier of fresh fruit and vegetables in Australia, providing premium produce to all of Australia’s major supermarket chains.
Just like Freedom Foods, Costa has its sights set on international growth. Over the first half of FY18 it continued with its plans to expand into China, securing land for FY19 plantings. It also increased its ownership stake in African Blue, a Moroccan-based joint venture between Costa and UK partner Total Berry to supply blueberries to global customers. Costa now owns 86% of African Blue, and has the option to increase this stake to 90% over the next three years.
Back home in Australia, Costa is investing heavily in new avocado farms in Northern NSW, cashing in on the current hipster preference for smashed avocados over home ownership.
Costa’s first half FY18 financial performance was strong, with revenues up almost 10% on first half FY17 to $489 million, driven primarily by high double digit growth in its avocado and citrus produce segments. EBITDA increased 29% to $61.5 million.
Management was so pleased with Costa’s first half result that they decided to upgrade the company’s full year NPAT growth forecast to 25% from the previously advised 20%. The market reacted favourably to the news, with Costa’s share price currently up over 20% since early February. It now trades at 21x earnings.
Both Costa and Freedom Foods offer great growth potential, and both are pursuing exciting expansionary strategies with a particular focus on the lucrative Asian market. I have personally invested in Costa and Freedom Foods because they are both capitalising on similar popular dietary trends without actually being in direct competition with one another.
That being said, in my opinion Costa clearly represents better value for money right now, as Freedom Food’s inflated price multiple makes me a little nervous. My advice to investors wanting to buy into Freedom Food’s long-term growth story might be to wait until the share price comes off the boil a little. It seems inevitable that shorter-term traders will start taking some profits soon and so a pullback in the share price should be your signal to buy.
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Motley Fool contributor Rhys Brock owns shares of COSTA GRP FPO and Freedom Foods Group Limited. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. 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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