There’s more than meets the eye for the exciting health food manufacturer, Food to Nourish (FTN). As an Australian-owned and operated organic and gluten-free food producer, here’s the lowdown on why we think this is an investment opportunity with a bright future.
Profits:
Unlike many early-stage businesses, FTN is already profitable with consistent and strong sales growth over the last three financial years. Profitable even back in FY18 and with a growing demand they could not meet, the company decided to upgrade to a new larger and custom built factory, resulting in a dip out of profitability in FY19. Now settled in the new home, the financial strength of the company is once again being demonstrated, reaching profitability and achieving the strongest sales month on record in Oct FY19. This consistently growing profit level can be attributed to an improvement on gross margins which are up from 50% in FY17 to 55% in FY19 reflecting a high degree of product efficiency stemming from strong vertical integration.
Existing Traction:
FTN is an established and validated business. Its products are already distributed in over 800 retail outlets nationally with another 5 outlets in Singapore. The demand has seen the team move to bigger premises twice and develop 37 product lines. No other Australian company produces such an extensive range of health food products that are organic, gluten-free and sprouted. And all this success is without significant investment into the online store, which in a world of e-commerce represents a massive opportunity to boost sales. Currently sitting at only 3% of the total revenue share, the team is aiming to grow this to 10%.
Assets:
FTN’s 600m2 West Gosford facility represents a solid fixed asset that further paints a picture of stability for the company. Unlike some competitors, FTN's custom machinery means it can take greater control of the production process and benefit from a range of scale factors. We’ve had a few queries about the negative asset balance, with $350,000 in non-current liabilities. However after our due diligence process we’re comfortable since this line item is almost entirely composed of an interest-free Regional Growth Loan from the NSW Government, alongside a smaller interest-free loan from company Directors in the startup process. As these loans are interest-free and therefore not urgent, the team has decided to remain focused on company growth first while gradually paying down the balances. This is further reflected as the Director loan is only able to be paid out with company profits and no more than 25% of profits in a year.
Valuation:
To get slightly more technical, another great reason to consider an investment is the valuation placed on the company for this raise. Despite being profitable and running a unique and well-equipped factory, FTN is currently valued at $1.4M, which was set by a cornerstone investor coming in on this round.
Market Opportunity:
FTN is perfectly poised to take advantage of a really exciting market opportunity both at home and overseas. It goes without saying that the health foods market is experiencing a period of rapid growth worldwide. The Australian Organic Market Report 2019 estimates a compound annual growth rate of 13% since 2012. The global organic packaged food market in 2017 topped close to US$30 billion. Australian brands, particularly in the health food industry, have a strong track record in expanding their offerings to Asian markets. FTN has already begun to expand overseas into Singapore. They can use this experience and the funds raised to further leverage existing capabilities to expand elsewhere into Asia and worldwide.
Contract Manufacturing:
Finally we come to what is potentially the most exciting reason to invest - contract manufacturing (CM). There’s a few reasons why CM is so important in this story:
- FTN has unique manufacturing capabilities that enable flexible and accessible minimum order quantities for burgeoning health food brands
- Rapidly growing market for health foods: FTN is not only benefiting by selling more of its own products, but can also capitalise on other businesses who need CM services for its products
- An increase in output for both the FTN brand, as well as current and potential CM clients, results in a decrease in cost of production, increasing margins and product efficiency for the company resulting from scale
When other companies need to manufacture health food products, there might be a number of barriers to entry. It might be a smaller player without the required scale to run its own facility. Or a larger player just entering the market without the capabilities in its own factories to produce certified organic, gluten-free and vegan products. FTN’s CM service provides high levels of support, manufacturing and nutritional knowledge and accessible terms with third-parties. In two years the CM arm has doubled now comprising 50% of FTN’s revenue, and is forecast to grow to over 60% by 2022.
Manufacturing over 40 product lines for 7 current clients, the company needs to upgrade the factory’s capacity with new equipment following this raise to meet current client requests and take on an additional 4 clients who wish to work with FTN.
These clients provide stable, recurring revenue and allow FTN to receive further benefits from scale due to larger ingredient order quantities and efficiencies. So while it might seem counterintuitive, to gain from the success of your competitors, in FTN’s case its unique capabilities make this yet another source of growth.
These are just a few of the reasons we think you should consider investing in FTN. Of course, it’s important that you review all relevant information yourself and make a careful assessment based on your own financial position. If you have any questions, we encourage you to reach out to the FTN team through the platform Q&A facility. Always consider the risk warning before making an investment.