Forbidden Foods (FFF) - Daniel Seeney

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BW EQUITIES RESEARCH 29 January 2021 Forbidden Foods (FFF) 2Q21: Another solid quarter ahead of Funch launch in 3Q21 FFF released its 2Q21 quarterly update and 4C yesterday morning, being the company’s first full quarter of results following its ASX listing in late- Recommendation August. Following the release, we revise our estimates very modestly and Target Price (AUD) 0.74 strongly re-iterate our BUY recommendation. Share Price (AUD) 0.23 Quarterly highlights include: Forecast Capital Return 229% Forecast Dividend Yield 0% ▪ Revenues +13% QoQ. 2Q21 revenues of $1.04m were up 13% QoQ, Total Shareholder Return 229% despite FFF’s Foodservice business remaining under pressure due to Market Cap 16.9 rolling lockdowns and border closures as a result of Covid-19. 1H21 Net Cash (Debt) 4.5 revenues were ~$1.96m, marginally below BW @ $2.2m. Enterprise Value 12.4 Shares on Issue (000s) 75,001 ▪ Cash receipts = $950k. Receipts were down 2% QoQ as FFF terminated Options/PRs on Issue 5.5 its debtor factoring facilities in the quarter; resulting in slightly delayed Lindsay Bettiol | Head of Research payments (cash collections as a % of revenues fell to 91%, from 106% in Q1). Key Executives ▪ OCF burn of $1.7m. Operating Cash outflows of $1.7m for the quarter Non-Executive Chairman Mark Hardgrave CEO & MD Marcus Brown were significantly higher than $210k in Q1, although this was driven COO & ED Jarrod Milani almost entirely by stock purchases ahead of anticipated sales in 2H21 Non-Executive Director Colleen Lockwood (discussed below). ▪ Inventory build. With ~$2m inventory on hand (or ~6 months’ worth of Catalysts stock), we except 2Q21 to have been the heaviest spending quarter for 2Q21 Quarterly Update Jan-21 FY21. Accordingly, we now expect FFF to deliver a cash flow positive Commercial Progress re: Funch 1QCY21 Exports, E-Comm, Acquisitions Ongoing 2H21, with a minor 3Q21 OCF burn of $26k. ▪ Cash balance = $3.1m + unused finance facilities of $735k leave the Major Shareholders company with $3.8m in available funds. Marcus Brown 12.5% ▪ Operations. Forbidden signed three major ranging deals during the Jarrod Milani 12.5% quarter, being (1) FoodWorks, across 500 stores, (2) Baby Bunting, Regal Funds Management 3.3% across 58 stores, and (3) Pharmacy Alliance, across 700 partner stores. Adam Soffer (CoSec) 3.3% Funch products prominently displayed at Foodworks (Fig. 1. Pg. 3). Within 12-month Price Performance its release yesterday, FFF provided several photographs which highlighted the prominent placement of Funch products across the Foodworks network of stores. Against this backdrop, our 2H21 Funch estimates (which assume sales of only ~$6/store/day at Foodworks) appear comfortably achievable. FFF remains undervalued relative to its peers. We see FFF as extremely undervalued relative to its peer group, with results released by WOA/PFT yesterday highlighting the extreme disconnect that continues to exist between these micro-cap FMCG food companies. (Fig. 2, Pg. 3). Re-iterate our BUY recommendation, PT to $0.74/Sh (from $0.78/Sh). We continue to expect FFF will deliver strong results for shareholders given its rapid top-line growth (FY20-FY24 CAGR = 67%), industry-leading margins (~35%) and highly-scalable cost base (opex CAGR = 34%), while the company remains well-priced relative to its peer group. Following yesterday’s release we make minor changes to our estimates which see our PT fall modestly to $0.74/Sh, representing a TSR of 229%. This report should be read in conjunction with the risks, disclaimer and disclosures sections which form part of this report and can be found at the end of this document. Level 30, 360 Collins Street Melbourne, Victoria, 3000 +61 (0) 3 9601 4800 BW EQUITIES RESEARCH Summary Financials P&L (A$m) FY20 FY21E FY22E FY23E FY24E Balance sheet (A$m) FY20 FY21E FY22E FY23E FY24E Customer Revenues 4.1 5.6 13.5 22.1 32.0 Cash & equivalents 0.1 2.7 3.0 4.0 6.5 Interest 0.0 0.0 0.0 0.0 0.0 Receivables 0.7 0.9 1.3 1.8 2.6 R&D 0.1 0.1 0.1 0.1 0.1 Inventory 1.1 1.9 1.5 1.5 1.5 Total Revenues 4.2 5.7 13.6 22.2 32.1 Other 0.3 0.3 0.3 -0.3 -1.4 Direct Costs 2.7 3.7 8.9 14.5 20.7 Total current assets 2.2 5.8 6.0 7.1 9.2 Gross Profit 1.5 2.0 4.7 7.8 11.4 Net PP&E 0.0 0.2 0.2 0.1 0.1 Expenses 2.4 4.2 4.5 5.9 7.6 Intangibles 0.1 0.1 0.1 1.4 3.6 EBITDA -0.9 -2.2 0.2 1.9 3.8 Total non-current assets 0.1 0.2 0.2 1.5 3.8 Net interest 0.1 0.0 0.0 0.0 0.0 Total assets 2.3 6.0 6.3 8.6 13.0 D&A 0.1 0.0 0.1 0.1 0.1 PBT -1.2 -2.2 0.1 1.8 3.7 Payables 1.4 1.4 1.4 1.4 1.4 Tax 0.0 0.0 0.0 0.6 1.1 Provisions 0.1 0.1 0.1 0.1 0.1 NPAT (rep) -1.2 -2.2 0.1 1.3 2.6 Other 2.8 2.8 2.8 2.8 2.8 Abnormal items 0.0 0.0 0.0 0.0 0.0 Total current liabilities 4.4 4.4 4.4 4.4 4.4 NPAT (adj) -1.2 -2.2 0.1 1.3 2.6 Long term debt 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.1 0.1 0.1 Ave shares (diluted) 0.0 75,001 75,677 77,926 81,000 Total long term liabilities 0.0 0.0 0.1 0.1 0.1 EPS adj (A¢) 0.0 -2.9 0.1 1.7 3.2 Total liabilities 4.4 4.3 4.5 4.5 4.5 DPS (A¢) na na na na na Total common equity -2.1 1.7 1.8 4.1 8.5 Cash Flow (A$m) FY20 FY21E FY22E FY23E FY24E Ratios & Valuations FY20 FY21E FY22E FY23E FY24E Receipts from customers 3.8 5.4 13.2 21.6 31.2 Gross margin (%) 36% 36% 35% 35% 36% R&D Grants 0.1 0.1 0.1 0.1 0.1 EBITDA margin (%) na na 1% 9% 12% Overheads -5.0 -7.7 -13.0 -20.3 -28.4 PBT margin (%) na na 1% 8% 12% Deferred taxes 0.0 0.0 0.0 0.0 0.0 NPAT margin (%) na na 1% 6% 8% Other 0.1 0.1 0.1 0.1 0.1 Cash flow from operations -1.1 -2.1 0.3 1.4 3.0 Incrementals Gross margin (%) na 36% 34% 36% 37% Capital expenditures 0.0 -0.1 -0.1 -0.1 -0.1 EBITDA margin (%) na -84% 30% 20% 19% Acquisitions 0.0 0.0 0.0 -1.3 -2.2 PBT margin (%) na na 29% 20% 19% Divestitures 0.0 0.0 0.0 0.0 0.0 NPAT margin (%) na na 29% 14% 13% Other 0.0 0.0 0.0 0.0 0.0 Cash flow from investments 0.0 -0.1 -0.1 -0.1 -0.1 P/E (x) na na 220.2 13.9 7.1 P/B (x) na 10.2 9.8 4.3 2.2 Dividends paid 0.0 0.0 0.0 0.0 0.0 EV/EBITDA (x) na na 77.5 7.3 3.2 Capital raised 1.9 5.0 0.0 1.1 1.8 Repaid debt/borrowed funds 0.0 0.0 0.0 0.0 0.0 Customer Rev growth (%) na 37% 140% 64% 45% Other -0.3 0.0 0.0 0.0 0.0 EBITDA growth (%) na na na 923% 99% Cash flow from financing 1.9 5.0 0.0 1.1 1.8 EPS growth (%) na na na 1480% 95% Total cash flow 0.8 2.8 0.2 2.4 4.8 June year end Ratios calculated using FFF share price of $ 0.23 Source: Company data, BW Equities Research estimates Page | 2 Forbidden Foods (FFF) 29 January 2021 Level 30, 360 Collins Street Melbourne, Victoria, 3000 +61 (0) 3 9601 4800 2Q21 Result Highlights BW EQUITIES RESEARCH Funch products prominently displayed at Foodworks Within its release yesterday, FFF provided several photographs which highlighted the prominent placement of Funch products across the Foodworks network of stores. Against this backdrop, our 2H21 Funch estimates (which assume sales of only ~$6/store/day) appear comfortably achievable. Figure 1: Funch end-of-aisle display at Foodworks FFF remains undervalued relative to its peers We see FFF as extremely undervalued relative to its peer group, with results released by WOA/PFT yesterday highlighting the extreme disconnect that continues to exist between these micro-cap FMCG food companies. While we acknowledge FFF’s QoQ growth was underwhelming relative to its peers, it should not come as a surprise, given the company’s Funch rollout only begins from 3Q21 (ie. now). We provide a brief comparison of FFF/WOA/PFT below. Figure 2: Forbidden Foods relative to its FMCG micro-cap food peers FFF rel. Peers FFF WOA PFT Revenues 1,040 989 Cash Receipts 950 889 1,700 QoQ Growth -2% 23% 72% OCF Burn 1,666 1,518 204 Enterprise Value 13,775 85,075 53,303 EV/Receipts 14.5 95.7 31.4 Valuation rel. FFF 6.6x 2.2x Page | 3 Forbidden Foods (FFF) 29 January 2021 Level 30, 360 Collins Street Melbourne, Victoria, 3000 +61 (0) 3 9601 4800 Disclaimer BW EQUITIES RESEARCH This research was prepared for wholesale investors only as defined by sections 708 and 761 of the Corporations Act. This report was prepared as a private communication to clients and was not intended for public circulation or publication or for the use of any third party, without the approval of BW Equities Pty Ltd (BW Equities). While this report is based on information from sources which BW Equities considers reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect BW Equities judgment at this date and are subject to change. BW Equities has no obligation to provide revised assessments in the event of changed circumstances. BW Equities, its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions. This report is made without consideration of any specific client’s investment objectives, financial situation or needs. Those acting upon such information do so entirely at their own risk. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever. DISCLOSURE OF INTEREST BW Equities and/or its affiliated companies may make markets in the securities discussed. Further, BW Equities and/or its affiliated companies and/or its employees, including the writer, currently own shares and from time to time may hold shares, options, rights and/or warrants on any issue included in this report and may, as principal or agent, sell such securities. BW Equities acted as Lead Manager to Forbidden’s Initial Public Offering and ASX listing in August 2020, earning customary fees. BW Equities have an ongoing commercial arrangement with Forbidden to provide corporate advice and services. The Directors of BW Equities advise that they and persons associated with them have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our Authorised Representatives may be remunerated wholly or partly by way of commission. ANALYST DISCLOSURE I, Lindsay Bettiol, certify that the views expressed in this report accurately reflect my personal views about the company and no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst has invested in the company’s shares. The analyst(s) responsible for preparing this research report received compensation based on several factors including BW's total revenues, a portion of which are generated by corporate advisory activities. BW Equities Pty Ltd ABN 66 146 642 462 AFS Licence No. 389353 BW Equities Contacts Rory Luff Benjamin Kay Lindsay Bettiol Brendan Jesser Executive Director, Corporate Executive Director, Equities Head of Research Equities +61 3 9601 4806 +61 3 9601 4801 +61 3 9601 4870 +61 3 9601 4805 [email protected] [email protected] [email protected] [email protected] Paul Pekish Tom Bleakley Paul Bryan Equities Equities Equities +61 3 9601 4809 +61 3 9601 4804 +61 3 9601 4810 [email protected] [email protected] [email protected] Page | 4 Forbidden Foods (FFF) 29 January 2021