After being in a trading halt for over nine months, shares in Freedom Foods Group Ltd (ASX: FNP) were reinstated and took a 94% nosedive yesterday.
Optimism improved slightly throughout the day’s trading session and finished at 53 cents per share, still 82% down from its previous close of just over $3 in June last year.
FNP share price
Freedom Foods background
Freedom Foods is a health-focused, vertically integrated company that produces a variety of food and beverages across six major brands. Some of its product offerings include plant-based beverages, cereals and other dairy and nutritional items.
What’s gone wrong for Freedom Foods?
The company ran into some problems last year and its shares were subsequently suspended from trading on the ASX. During this time, a review by advisers, including the FY20 audit by Deloitte, and a forensic accounting investigation by PwC identified a range of accounting matters going back a number of years.
Shortly after, the company revealed that it was anticipating more write-downs than what was previously announced. Due to obsolete and out of date stock, write-downs for FY20 were to be around $60 million, up from $25 million based on its previous announcement.
As a result, Freedom Foods was required to restate its FY19 and FY18 and prior period accounts. The company advised this was mainly due to unrealistic or optimistic assumptions in accounting treatments.
Freedom’s full-year results were then released which revealed the company actually made a $174.5 million statutory loss despite total revenue being up 26% for the year. Across the same period, net debt had jumped 125% to $275.2 million.
Freedom’s management team was reshuffled significantly over the last 12 months, with the CEO and CFO both departing amidst the investigations.
The value of the Perich Family’s 52.5% stake in the company reduced from $428 million to around $72 million in just one trading day.
Potential turnaround?
Freedom has just announced it will raise up to $265 million through convertible notes and will restructure its existing debt facilities with NSBC and NAB.
The notes will be comprised of a wholesale investor offer, as well as a placement from Arrovest, a family-owned investment company whose board consists of the Perich family.
Most of the proceeds will go towards paying down existing debt, with the remainder being used to support operational needs as the business executes its turnaround strategy.
Despite the challenging backdrop, management appears to be confident that structural growth drivers will support the company’s outlook from here.
On an operational level, it’s undertaking a transformational program that will improve areas such as manufacturing, supply chain and financial enablers, with benefits expected to be realised over the next three years.
Freedom’s board has been renewed, with changes to various committees including Finance & Audit, and Risk & Compliance.
The management team has undergone some changes, with Michael Perich acting as the current CEO.
My take
The Australian Financial Review reported a number of fund managers said most of the damage had been inflicted in the past 9 months when Freedom Foods was forced to restate its accounts, take major wrote-downs and a report flagged possible fraud.
I share this sentiment and it serves as a reminder for investors of the importance of assessing management teams and keeping up to date on any news about the relevant company. As such, investing in education can prove to be an effective tool in identifying potential irregularities or red flags early on.
In saying this, Freedom Foods has formulated a turnaround plan and the ASX has allowed it to relist, so time will tell whether it can get back on its feet.
Buy/hold/sell?
With shares reaching 18 cents at their lowest yesterday, some investors have already nearly tripled their money in just one day. While I can partially see the appeal of a short-term trade with the assumption that the stock’s been oversold, it doesn’t really interest me as someone with a longer-term investment horizon.
The company’s reputation has suffered significantly and it’ll most likely take quite some time to rebuild the trust of all stakeholders involved.
Shares seem dirt cheap relative to where they were, but it’s not enough reason for me to be a buyer today.
For me to be an investor of Freedom Foods, I’d likely need to see years of a demonstrable track record that would indicate its improving and has overcome its previous challenges.
For more share ideas, click here to read: I think these are the best large-cap ASX shares at the moment: XRO, ALU & CSL.
