Farm Pride Foods: The chooks are cluckin’

A look back at the company’s historical performance paints a messy picture - inconsistent results over an extended period.

However when we first came across the business in mid-2015, it was apparent that several things were changing that would drive improved performance.

The company had recently appointed a new CEO who had been with FRM for some time so knew the business backwards. Management now appear to be doing all the right things. Despite a 5% reduction in revenue, earnings increased some 67% in FY15. Some areas of focus have been cutting costs, improving efficiency, cancelling uneconomic supply contracts and paying down debt with the cash generated by the business.

We expect the FY16 accounts to show a net cash position and very strong EBITDA growth relative to the $12.2m result in FY15. We also believe there are now a number of opportunities for FRM to deliver top-line growth. Construction of a new free range facility will complete this year and there is latent capacity at its existing facilities which is likely to drive operating leverage. The company has also indicated it could look to grow by acquisition and West Coast Eggs 49.8% stake could provide an opportunity. The egg production industry is fragmented and scale is important.

FRM’s strong share price is not all explained by management’s hard work. The company has also been the beneficiary of some powerful industry tailwinds. The supply-demand balance in the egg market has shifted in its favour as demand for free-range is growing, yet new supply has been constrained by uncertainty around the free range definition and labeling requirements. This, combined with the change of seasons (hens lay less in winter) has resulted in the current egg shortage. Based on our research, the shortage has been most pronounced in Victoria and New South Wales, the markets where FRM is most exposed.

The first broker initiated on the stock in late May with other analysts likely to follow suit, leading to increased institutional awareness.