Freedom Foods to Raise $130m for Expansion Plans
The cereal and dairy manufacturing giant Freedom Foods Group (ASX: FNP) have announced a $130 million equity raising to accelerate the expansion of its nutritional ingredients manufacturing on Thursday (24th May). The company has since entered a trading halt until next Monday unless ASX decides otherwise.
Overseen by UBS and Veritas, the equity raising will consist of two components both at the price of $4.80 per share, aligning with the company’s last close. $65 million is expected to be raised through a one for 18 entitlement offer for shareholders, which will be fully taken up by the group’s largest shareholder Arrovest (a subsidiary of Perich Group), whilst the other half will be comprised of an institutional placement of new shares.
According to the group, $100 million will be placed for accelerated capital expenditure programs in nutritional ingredients through to 2020, with the remaining $30 million towards working capital. The program is estimated to enable the company to increase its production capacity by as much as 200 per cent next year and by almost 70 per cent more in 2021.
The group described the expansion as a foundation in aiding Freedom Food’s strategic positioning as a major international food and beverage producer, to better facilitate the growing demands emerging from both the domestic market and across the Chinese and South-east Asian markets.
The growth in nutritional ingredients capabilities has been the focus of the group’s strategic direction in recent years, following the opening of a new Sydney plant in 2017. These capabilities have attracted strong customer demands, whereby the nutritional segment saw sales grow 698% to $14.4 million in FY18 and various commitments have also been received for the sale of a variety of nutritional ingredients through 2020 and beyond. The company’s new strategic direction has been driven by the structural change in the Australian dairy industry and increasing demand for organic foods domestically, along with the group’s increasing operational footprint and market share overseas. Hence, Freedom Food’s capital raising decision will be in place to support the company’s growth strategy in leveraging both organic developments and its acquisitions.
The macro trends have provided strong evidence in supporting the continuing strategic direction of Freedom Foods to capture the Asian market share. Since the commencement of the China-Australia Free Trade Agreement (ChAFTA) in 2015, Australian food and beverage exports have seen an exponential increase in meeting the growing Chinese demand, which will be further stimulated by the emerging middle-class population in the country, which is estimated to reach 77% by 2022. Hence, it is expected that the Chinese demand for higher quality organic food and dairy products will continue to drive the export growths from Australian food manufacturers including Freedom Foods Group.
Additionally, China is the world’s largest dairy market by volume and Australian exports to China for dairy have increased by 164% from FY14 to FY18, and this trend is expected to continue to grow, especially due to eroded consumer trust in the local supply chains following numerous food safety incidents over the past decade. This has already been driving Freedom Foods’ largest product segments of dairy and cereals and snacks over the past few years, which will be further accelerated by their strategic partnership agreed in November 2018 with Theland, a China-based brand owner and distributor that is majority-owned by e-commerce giant Alibaba Group.
Established in 1986, Freedom Foods is best known as a nutritious food manufacturer consisting of brands such as Milk Lab, Messy Monkeys and Australia’s Own. The group last conducted a $200 million (just under 20 per cent of its market capitalisation) capital raising in March 2018, with $120 million injected to similarly fund the capacity expansion directed at nutritional and dairy productions, with an emphasis on the UHT processing plants. The company has invested more than $400 million over the past few years to boost processing capacity of dairy proteins used in health foods and supplements as the first stage of the group’s medium-term production capacity expansion plan, which will be completed this year. The current $130 million capital investment is implemented to further facilitate the second and third stage of this plan from 2020 and beyond.
The Thursday’s announcement has also outlined the projected net sales revenue for the year ending June to rise 36 to 39 per cent to between $480 million and $490 million from FY18, despite it being a downward revision from its original guidance of between $500 million and $530 million. It is estimated by the company that the increase in nutritional ingredients CAPEX to deliver an annualised return of more than 40 per cent within 24 months.
The food manufacturer will resume normal trading on Monday.
By Andrew Gu
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