There is an ASX share that's almost completely wiped out its investors — but one fund manager thinks it could be a bargain buy now.
Collins St Value Fund portfolio manager Michael Goldberg, nominated it as his "out of the box idea" to buy shares in the conglomerate that owns Donut King, Michel's Patisserie, Gloria Jean's Coffees, Brumby's bakeries and Crust Pizza brands.
The trouble is, Retail Food Group Limited (ASX: RFG) stocks went for in excess of $7.50 in 2015 but now trade at 9 cents. That's a 98.8% loss for those poor shareholders.
"This is a company that, due to historical factors, has left a bad taste in the mouth of many investors," Goldberg posted on Livewire.
"Regulatory action being undertaken by the ACCC based on the historical treatment of franchisees and the closure of many shopping centres around the country throughout the COVID-19 pandemic haven't helped matters either."
Incredibly, the fund manager sees the share price at around 15 cents within the next 12 to 18 months. That would be a tidy 67% return.
There are 3 reasons for Goldberg's conviction:
Image source: Getty Images
New management improving technology and franchise relations
The 2 biggest problems that pummelled Retail Food's fortunes are now being reformed by a new executive team, according to Goldberg.
"Culture trumps strategy. For a long time, it was questionable if Retail Food Group were getting either right," he said.
"But under the relatively new leadership of Peter George, positive, tangible changes have been made."
The improvements include slimming down the store count from more than 2,500 in 2017 to now 850.
"This is important because the relentless growth pursued by the previous management teams saw far too many franchisees getting burned," said Goldberg.
"Growth needs to be measured, sustainable and done in a way where all stakeholders get a fair slice of the financial pie."
The current leadership also recognises the importance of technology to adapt to the modern world, especially during the COVID-19 pandemic.
"A classic example of this is the way in which Gloria Jeans pioneered drive-through coffee purchases at a time when cafes were under forced closure," said Goldberg.
"This strategy saw same-store sales actually increase by nearly 20% — offsetting the declining figures from those cafes that weren't able to serve as many customers as usual due to social distancing requirements."
The stock is soooooo cheap right now
Mathematically, Retail Food shares are a bargain, according to Goldberg.
The stock was trading at 7 cents when he made his comments.
"Earnings of 1 cent per share can be cheaply bought based on the 7 cent share price (P/E of 7) and look very favourably priced against other broadly comparable companies such as Domino's Pizza Enterprises Ltd. (ASX: DMP) — 50x, Collins Foods Ltd (ASX: CKF) — 27x and, to an extent, Metcash Limited (ASX: MTS) — 15X."
The fund manager reckons from here that earnings per share can grow at 15% per annum. There is even the "potential" for an 8% grossed-up dividend yield within the next 12 months.
"An obvious catalyst for a re-rating for the stock if ever there was one!"
It can't get any worse
After such a horror half-decade, surely any further news can only be good news, argues Goldberg.
"After all, Australian's love of a good pizza or a doughnut hasn't changed over the last five years – it's the investors who need convincing!"
While the current management is defending the company against the regulatory action from the consumer watchdog, it has signalled its intent to reform.
"They have made a genuine commitment to right the wrongs of the past and it is my view that any news will be good news in terms of settlement figures/timing."
Once the legal proceedings are over, the executive can simply focus on growth, according to Goldberg.
"For some, this may be a difficult story to believe, particularly those who have been on the journey with RFG for some time," he said.
"But the key ingredient in successful value investing is 'being comfortable feeling uncomfortable'. After all, to earn what others don't you have to be prepared to invest where others won't!"
