Gluten free and health foods business Freedom Foods Group Ltd (ASX: FNP) handed the market a mixed update this morning that it now expects full year sales revenues to come in around $353 million, compared to a prior forecast for revenue to be at the “high end” of a range between $360 million to $380 million.
That’s a mid-to-high-single digit miss on guidance, but the group compensated with guidance for total sales in FY 2019 to be between $500 million to $530 million thanks to it having new products, contracts, and customers expected to come online in the first half of FY 2019.
Freedom Foods will deliver sales growth close to 50% if it meets the top end of that guidance, although given today’s guidance miss meeting those ambitious targets seems a long way off. After all it was only back in mid-March 2018 that the group reaffirmed its guidance for FY 2018, before delivering today’s substantial miss in a result it blamed on delays in new product launches among other factors.
Back in March 2018 the group raised $200 million at $4.80 per share in order to invest capital in manufacturing facilities, potential acquisitions, and to pay down some of its net debt, with investors still in the black despite today’s share price fall.
The group also updated that the “major capital expenditure” projects that the capital raising funds were earmarked for are “generally on plan” and expected to contribute a material amount to sales revenues from FY 2020.
Freedom Foods products can be commonly found in the increasingly popular health food isles of your local Woolworths Limited (ASX: WOW) or Coles supermarkets, with the group also investing heavily to expand overseas into SE Asian and Chinese markets.
For the first half of FY 2018 the group reported an adjusted operating profit of $5 million on revenue of $159 million. It also paid a dividend of 2.25 cents on operating earnings per share of 2.45 cents. Given the stock is selling for $6 today on a market value over $1.5 billion you don’t need a Bloomberg terminal to see it’s richly valued using historical earnings metrics.
However, the fact it’s “forecasting” revenue growth close to 50% in FY 2019 with more revenue growth expected in FY2020 on the back of current capital investments much will depend on whether it can deliver increased operating margins to justify today’s lofty valuation.
I’d rate the stock a hold on valuation grounds, with its decent outlook and large insider ownership meaning it remains one for my watch list.
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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.