Tuesday, November 6, 2012

FFI Holdings Limited

I have kept an eye on FFI for quite a few years. Its main business is food manufacturing in Australia, mainly chocolate products, bakery products and small goods, both under its own brands and also contract manufacturing for house brands.

Given the dominance of the two retail chains in Australia, and the ongoing price war with the resurgence of Coles, not to mention inroads made by interlopers such as Aldi and Costco, it was always going to be a tough slog for this minnow. Over the last 2 years, FFI's NPAT has decreased by over 50% even though sales volumes have been maintained. Rising input costs and labour costs did not help. This is the main reason why I have not bought any shares in FFI, despite a fabulous special dividend two years back, and consistent dividends coupled with a long operating history with shareholder friendly management.

The open secret about FFI is that it holds a huge parcel of industrial/commercial land- 67000 square metres to be exact.  This is carried in the books at historical cost of $14m. With a market cap of $28m, if we back out the land, the business is actually trading at PE 7. Although this appears cheap, everyone knows that holding vacant land is a money chomping exercise, and coupled with the operating headwinds facing the business as described earlier, there is really no table thumping reason to get excited yet.

This all changed after trading hours on 5 November 2012, when FFI announced that it had sold a parcel of land (about 2700 square meters) for just shy of $1m.  I will leave readers to work out the valuation implication of this announcement.

This is evidence based investing at its purest. By my estimates, there is now some 30% to 50% upside based on valuation, assuming that the current headwinds faced by the business do not abate. I view this as unlikely, and in any event, the bad news have already been baked into the valuation (poor pun intended).  The more important thing is that given the healthy cashflows generated by the operating business, a market cap of $28m presents a very low downside risk to an investor.

Disclosure: interests associated with my family holds shares in FFI.

Disclaimer: the contents of this post is not to be relied on as financial advice.  It contains my personal opinion only, plus facts that I cannot verify to be accurate.  Do your own research and seek financial advice where appropriate. I have made many mistakes in the past, and will continue to do so in the future.


Dean said...

Interesting opportunity Peter. What do you make of the auditor resigning last week? That's generally an avoid flag to me.

Peter Phan said...

Sorry for the delay. The auditor's resignation is mandated by the Corporations Act. Auditors may not have more than 5 years in any successive 7 years period. Bentley's tenure is 5 years exactly. The resignation is a non-event.