I've exited as of today, following the news last night that Capital H has been selling and has now gone below the substantial holder threshold (<5%). That breaks my investment thesis. Without any further requirements to disclose movements to the market, unfortunately, it is not clear what Capital H plan to do with the remainder of the position and thus it could become an overhang on the stock. It is likely that they are trimming back their position as the scenario is not playing out as expected, so far. Yet to be seen as to whether they will exit in entirety or hold the 5% for now and give the CEO a further chance to make something of this new, higher-margin strategy.

https://reachmarkets.com.au/stock-farm-pride/

These two presentations from Harley Grosser (from Capital H) and Daryl Bird (Farm Pride Foods CEO) are probably the best place to start to get up to speed on this stock:

Consumer preference for cage-free eggs has grown over the past few years. More than 60% of eggs sold in major supermarkets are cage-free and the free-range egg market is expected to continue to grow 3% to 4% annually. 

In line with the changing market demands, there is now a plan to phase out all cage eggs from major retailers by 2036. 

For the key players in the Australian egg industry, worth approximately $1 billion annually, the plan will require a complete overhaul of their business models to meet the new requirements.

This follows a rough year for egg producers after they took a double hit from restaurant closures and huge culls to bird stock due to an avian flu outbreak.

Farm Pride (ASX: FRM), one of Australia’s biggest egg producers, has an innovative strategy that has seen the business come out on top of this egg and spoon race.

“We’ve fully recovered from pre-COVID sales and we’re growing that business quite strongly. Going forward, our focus is to re-establish our innovation programs, maximise our value-adding capability, and seek additional opportunities to reset our shell egg business with our retailers,” Farm Pride CEO Daryl Bird said.

In order to maintain a sustainable and profitable business moving forward, Farm Pride is looking to further capitalise on high-margin opportunities, including convenience products such as egg-based baking products, snacks, and sports nutritional drinks.

This strategy to push aggressively into the value-added, higher-margin product space is appealing to fund managers like Harley Grosser, founder and CIO of Capital H Management, who believes Farm Pride is undervalued at the moment.

The stock is currently trading at 20 cents. Mr Grosser said it should really be worth around 70 cents as it currently is, and the CEO’s strategy should push it up further.

“If the CEO really gets that value-added side of the business firing, which is 20 to 40% margin, then this business could eventually be doing the EBITDA it was doing back in 2016,” he said.

In 2016, Farm Pride recorded a historically high EBITDA of $10-12 million, which pushed stocks up to $2.50 each before the industry was set back by an outbreak of avian influenza and COVID-19.

“We think later this year there will be positive news flow around new product releases that the market is not anticipating and the stock is already very cheap,” Mr Grosser said.

“It’s not a commodity business anymore, it’s a product differentiated by brand. That’s your real upside.”

I'm continuing my due diligence — would welcome any opinions.