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Freedom Foods delivers 27% increase in half year profits: Should you invest?

The Freedom Foods Group Ltd (ASX: FNP) share price will be on watch on Friday following the release of the diversified food company’s half year results after the market close yesterday.

Here’s how Freedom Foods performed in the first half in comparison to the prior corresponding period:

  • Net sales increased 31% to $209 million.
  • Gross margin lifted 1.4 percentage points to 24.7%.
  • Operating “EBDITA” up 31.2% to $21 million.
  • Operating net profit increased 27.6% to $6.4 million.
  • Interim dividend flat at 2.25 cents.
  • Outlook: Low end of sales guidance range of $500 million to $530 million.

What were the drivers of the solid result?

During the first half the company achieved increased sales and earnings contributions from its Dairy Beverage, Nutritionals and Plant Beverage business units, offset by reductions in its Cereals & Snacks and Specialty Seafood business units.

The Dairy Beverage unit was the star of the show, growing revenue by 79% to $102.7 million. The unit now contributes almost half of its revenue. This growth reflected increasing demand in Australia, China and South East Asia.

The company’s managing director and chief executive officer, Rory Macleod, appeared to be pleased with the first half performance at its outlook.

He said: “The Group continues to experience strong demand across its business activities in Australia, China and SE Asia. This growing demand in dairy, plant-based beverage, cereal and snacks reflects the positive impacts on the Group of structural change in the Australian dairy industry, demand for the products from the Group’s expanded operational footprint and increasing brand penetration and market share in key channels and categories in Australia, SE Asia and China.”

Outlook.

In July the company provided sales guidance of $500 million to $530 million. This will be an increase of 41.5% to 50% on FY 2018’s sales of $353 million.

However, based on its current trading and the short-term impact of a reduction in major contract manufacturing arrangements, management expects net sales revenue in FY 2019 to be at the lower end of the guidance range.

Should you invest?

I’m a big fan of Freedom Foods and believe it is well-positioned to deliver strong sales and earnings growth over the next few years.

However, its shares are trading at a significant premium to the market average. This could make it worth holding out in the hope of getting in at a fairer price in the future.

Until then, A2 Milk Company Ltd (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL) may be better options.

Alternatively, these growth shares could be even better picks for March.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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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