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#The end
Added 2 months ago

Not a surprise given the past few years performance


Halo Food Co. Limited (Liquidators Appointed) (Receivers and Managers Appointed)

ASX code: HLF

ACN 621 970 652 (‘the Company’)

Appointment of Liquidators ASX code: HLF

Notice is hereby given that Michael Korda and Robert Hutson of KordaMentha were appointed Liquidators of the Company and the companies in the attached schedule (together ‘the Companies’) on 30 January 2024.

Pursuant to Section 436A of the Corporations Act (‘the Act’) at the Second Meetings of Creditors of the Companies held on 30 January 2024, the creditors of the Companies resolved that the Companies be wound up under Section 439C(c) of the Act and that Michael Korda and Robert Hutson be appointed Liquidators.

As per our previous announcement David Hardy, Ryan Eagle and Emily Seeckts of KPMG were appointed as Receivers and Managers of the Companies on Friday, 25 August 2023. The Receivers and Managers continue to have day to day control of the assets and trading operations of the Companies.

We confirm that the Liquidators have put in place arrangements to respond, free of charge, to members’ and creditors’ queries in relation to the consequences and progress of the external administration.

The contact details of the Liquidators are:

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#ASX Announcements
stale
Added 7 months ago

Another one bites the dust. This may be one of the biggest piles of shit I've seen for a while. Good riddance.

Commiserations to anyone who got roped in.

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#Management
stale
Added 8 months ago

And it keeps getting worse. How can an acquisition in Feb 22 for $17M then be impaired by $11.3M in May23 and sold in Aug 23 for $588,540? Divestment of THM

Halo retains the manufacturing of THM products for 18 months

At the time of purchase this is what we were told.

  • A fast growing, profitable and cash generative business, in FY21, THM recorded revenue of ~$21 million and normalised EBITDA of $4 million
  • Acquisition price of $17.0 million and a $5.0 million earn-out, subject to revenue and EBITDA performance milestones

Have things really changed by that much? If things are that bad is the company not trading insolvent?

My timing on this one was spectacularly wrong and a lesson hard learnt. Do not take announcements as being accurate and beware change in management which looks to only serve itself.

Held in SM and RL as so little left it is not worth selling.

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#Financials
stale
Added 9 months ago

One of the best examples of capital destruction I can remember seeing in recent times. A reminder of how important management is in small caps.

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Valuation of $0.010
stale
Added 10 months ago

I've been watching this dumpster fire from a distance.

It’s now at the point where the outcome is somewhat binary. Its either a 0, or you’re gong to make decent money.

In hindsight, the acquisition of THM was borderline insanity.

The current MC of just under $5mil is a discount to NTA (somewhere around $6.5mil) and a “strategic review” has just been announced. Hopefully assets will be divested, and some shareholder value can be restored.

A few days ago, it was announced that the property holdings had been divested at a premium to book value. I dare say that’s the only thing that can be divested at a premium to book value….

The real judgement to be made is whether:

a)    Any of the goodwill on the balance sheet is worth anything to a prospective buyer.

b)   How much cash HLF will burn through before it can divest its assets and stem the bleeding.

Below is a breakdown of goodwill on the balance sheet. Hmmmm…..


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#Strategic Review
stale
Added 11 months ago

Words to make me feel nervous "Strategic Review"

Looks like Halo are looking for a buyer after employing Modus Partners to undertake a strategic review of the company.

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02663447-6A1149116?access_token=83ff96335c2d45a094df02a206a39ff4

Hold in SM and a small holding IRL

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#Business Model/Strategy
stale
Added one year ago

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Slightly higher shelf in a different Woolworths but already at 1/2 price!

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#Selling the farm
stale
Added one year ago

Oh dear!

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it seems someone has noticed that HLF have advertised their manufacturing premises for auction on the 2nd of March. They’ve been issued a “please explain” by the ASX and the answer is a bit of time-saving fluff

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02631355-6A1136385?access_token=83ff96335c2d45a094df02a206a39ff4

Not sure what this does for the credibility of management/board and investment thesis.

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#Business Model/Strategy
stale
Added one year ago

The Healthy Mummy products at Woolworths. Not exactly premium position on the bottom shelf compared to man/lady shake.

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#Q3 CY22 Result
stale
Added one year ago

My brief thoughts are as follows (apologies for any typos - in a rush):

THM

  • I am concerned that THM may have ballooned up sales before the acquisition via cheap one-off lifetime memberships ("platinum memberships").
  • Now, those membership options have been removed in the hands of an operator (Halo) focusing on eCommerce metrics like retention, churn, LTV, CAC etc., which is the right thing to do for a long-term subscription business, but reflects poorly on Halo's judgement upon acquisition (due diligence) (I.e. it is now all about recurring revenue, not one-off sales).
  • The alternative explanation for THM's low sales is seasonality and probably also a combination of La Nina and macroeconomic factors (rising living costs, rising rates etc). THM's solutions are much less appealing during a wet/cold winter/spring than a dry/hot winter/spring
  • It's possibly a combination of both of the above - we'll find out over the next 6 months whether they reach the $20m+ top line for THM p.a.
  • It's lucky that Halo paid less than 4x EBITDA for THM, because if the earnings come in at half of what they "were", we've actually paid 8x.
  • I'm not overly impressed with Rhian at this point. If the next 6 months don't deliver, I'll feel the numbers were artificially inflated in the 12 months leading into the acquisition and that Halo was perhaps a little misled, enabling an exit. Although we can only speculate.


Valuation & Where to From Here

  • Circa $17m market cap now so it is virtually being priced as if it will not make a profit.
  • Trading below NTA based on the last time I looked at tangible assets.
  • Not all of those assets are recoverable in a fire sale though and wouldn't find their way back to shareholders.
  • But that's not my thesis anyway; I suspect we will eventually see profits flow through at a greater scale due to operating leverage.
  • I do wish they hadn't acquired THM though and just focused on achieving scale in the CM business complemented with Tonik sales
  • What has played out here goes to show how important capital allocation is... I still remember the day of the acquisition and thinking it was a very odd left-field acquisition ...
  • I believe that the board, particularly Peter James, has a vision for Halo as a diversified and vertically integrated brand owner and operator... So he's possibly the driver behind the acquisitions to deliver a greater percentage of branded sales.
  • He's right in that F&B companies with brand power trade at much higher multiples, but THM was not the right fit for Halo in my opinion. I'm not a fan of THM.
  • They can still make it (THM) work, I think they are bringing in the right talent to do that (new head of marketing). But it is not an easy business (THM).
  • Remains a hold for me. And a buy once they hit the green light of actual profits.
  • I do think they will get to profits eventually. They are doing better than most in this space. Rising rates and inflation have hit most consumer discretionary plays way harder than HLF (>40% of ASX-listed F&B plays are massively unprofitable). HLF is doing comparatively well.
  • I think Jourdan Thompson is the right person for the CEO job and will bring Halo to NPAT profitability within the short-medium term.
  • They need to deleverage as soon as possible; I don't like having debt involved and this is a risk.


And now we await another 3 months!

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Valuation of $0.155
stale
Added one year ago
  • FY23e revenue of $90m
  • FY23e underlying EBITDA margin of ~10%
  • FY23e underlying EBITDA of $9m
  • EV/EBITDA multiple of 8x
  • EV of $72m
  • Less net debt of ~$10
  • MC of $62m
  • SOI of 400m
  • Share price target of 15.5c
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#New CEO
stale
Added one year ago

Ultimately, I think this decision (for Jourdan Thompson to be promoted to CEO) reflects acknowledgement from the HLF Board that i) the share price journey over the past few years has been abysmal and ii) that the level of engagement with shareholders (and subsequently investor sentiment) needs to change. It also reflects their respect for JT's operating & leadership ability.

I believe this is a turning point for Halo. As the new CEO, JT has a major opportunity to re-connect with shareholders, bring the company into NPAT profitability, reset relations with investment funds, and return to a A$100m+ market cap. Having spoken with him on multiple occasions (including the Strawman interview), I believe JT will be a strong new figurehead for Halo and increase the level of engagement with shareholders.

Danny's farewell post on LinkedIn (albeit he is moving to Head of Revenue - probably a better fit for him anyway due to his sales focus) was a little tone-deaf to the shareholders who enabled that "26x increase in revenue" and who are down significantly on paper.

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He mentions revenue growth but not growth in shares on issue... as a CEO of a listed company, his performance should be anchored to the share price, or at the very least revenue per share, not revenue alone.

With that said, I believe that this company is now in the strongest position they have ever been in since listing.

Scaling a contract manufacturing business is extremely capital intensive and early shareholders have been the guinea pig of this. However, the business is now at scale with $80m run-rate revenue and is in a position to turn an NPAT profit, which I am expecting in FY23 and beyond.

With operating leverage now kicking in, NOW the focus of this company should turn to profitability and finally shareholders should be rewarded.

From here on in, there are no excuses. Going forward, with a new CEO, I want to see the share price as Jourdan Thompson's single most important measure of success (and he is totally aligned with this). Additionally, all Directors/senior management should have at least 2x their annual base in shares, ideally 5x, to enable this alignment.

I personally wouldn't be surprised to see the Directors and Jourdan buying more (they were buying at ~6.7c in the SPP) following the next quarterly release (at the end of October) once they emerge from the blackout period. They are not currently allowed to buy on market.

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#7.1A Mandate Dropped
stale
Added 2 years ago

Very pleasing to see Halo management receptive to shareholder feedback, dropping the 7.1A mandate at the AGM. In my eyes, this is confirmation that Halo is confident in the cash flow position and path to profitability... The next quarter will be telling.


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#Upcoming HLF Meeting
stale
Added 2 years ago

Hello Strawpeople,

A reminder that we will have the opportunity to hear from Jourdan Thompson (HLF CEO) this coming Thursday at 12:30pm AEST. Please feel free to pose questions at the link below prior to the discussion!

Slido Q&A Link: https://app.sli.do/event/d1jqJ4RdVMKiN8j7isiZJc/live/questions

Looking forward to it.

Jourdan is the Chief Financial Officer of Halo Food Co. Prior to joining Halo Food Co in 2017, Jourdan spent over 15 years in investment banking, finance, insolvency and restructuring both in Australia and Europe. Working most recently as a director at Greenhill & Co’s Sydney office, he principally focused on strategic and advisory mandates for ASX200 clients. He began his career at KPMG in the Corporate Recovery and Restructuring team, prior to moving to the Corporate Finance team at Ernst & Young, and has also worked for ING Investment Bank in London. Jourdan is a qualified Chartered Accountant and holds a Bachelor of Commerce degree, majoring in Accounting and Finance, from the University of New South Wales.

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#Management & Reporting
stale
Added 2 years ago

I'm not very good at reading financial reports and the latest report from this company appears to me comparatively harder to read than most.

It's not clear to me what the 'other segments' heading is under Note 4 of the "Operating Segments" section. That's where the company reports an ~8 million dollar loss.

Additionally, the management compensation appears to be having a significantly negative effect on profitability. The stated salary, equities and options awarded to management over a long time frame appears to be incredibly generous.

Am I reading these points wrong?

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#Q&A with Management
stale
Added 2 years ago

I had the chance to get on the phone today with the CFO:

- The free cash flow adjustment of (-$4.7m) + $1m (one of acq costs) + $0.6m (WC adj) + $4.3m (debtor delay) = +$1.2m, was confirmed by JT, all of those adjustments are one off costs/impacts that should not recurr.

- TheLand China deal is not dead but has stalled. They received a small order recently (~$2m) but are tracking well under where it was hoped ($42m over 2 years). This is partly because of high milk prices and it is hoped that with prices trending down entering spring that contract could pick up again.

- THM seasonality: couldn't get exact splits out of him but it is tracking level YoY. (i.e. in line with FY21 of $21m). In other words, the June quarter is about 20% of a full year. They are hopeful THM will be growing YoY when their initiatives for Spring/Summer kick in.

- Rhian's departure was also a surprise for them but the rest of the THM team remains highly aligned and excited by the opportunity ahead. They will gradually shift the brand over time to have the community as the face of the brand, not Rhian.

- If all goes to plan, they remain positive THM will continue to be CF generative over a year. This will allow them to pay down the debt profile.

- Regarding AGM resolution 5 (7A mandate): they have absolutely zero intention to capital raise. JT was quite adamant about this. This (7A mandate) is what they attempt every year as do many other small caps. This gives me confidence personally that the business should certainly be CF+ across the coming quarters.

- Investor comms: JT has agreed to do a Strawman investor Q&A (this time we'll hold him to it!), check out the meetings page for more details and to submit questions.

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#Ongoing Growth in CM
stale
Added 2 years ago

One factor that has continued to impress me in this most recent update (and what initially drew me to Halo before the acquisition of THM!) is Halo's ongoing growth in contract manufacturing (capabilities acquired via Omniblend) recording $15.9m in CM sales for the quarter. I think 2 key factors have driven growth in Halo's contract manufacturing division:

  1. [Industry Wide]: The decentralization of the food and beverage supply chain away from legacy brands with vertically integrated manufacturing towards new, innovative products that require a more nimble and innovative supply chain. This is driving industry-wide growth in contract manufacturing of around ~11% p.a.* (~3x the growth rate of the underlying F&B sector it serves)
  2. [Firm Specific]: Competitive advantages based on differentiated capabilities, particularly those with high entry barriers and no practical substitutes. For example, Halo's state-of-the-art snacking and bar line and manufacturing plant in Prestons [Sydney], which now appears to be serving Coles's private label protein bars. As far as I am aware, this is the only facility in Australia with the capability for layered protein bars.

High-quality assets with differentiated capabilities should in time garner acquisition interest and valuation premiums, while lower-quality assets with more common capabilities will likely see limited traction in the market and diminished valuations. Given that Halo's contract manufacturing growth rate is well in excess of the industry growth rate for CM, I am running with the assumption that Halo is evidently stealing market share from other contract manufacturing firms. For me, this is great news because the key to unlocking returns (improved margins) in CM is scale.

* Source: Cascadia Capital

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#Q2 CY22 Results
stale
Added 2 years ago

Solid (but not excellent) numbers in my opinion.

Suggests that there may have been a leaky ship today with buying volume significantly up. Let's see if the buy side builds over the weekend / pre-market open on Monday. The THM numbers are largely* where they were reported to be pre-acquisition even though the market appeared to write the business off entirely; with the share price declining more than 55% post-acquisition. So in that context, I think this is a good result relative to expectations.

  • The contract manufacturing business appears to be continuing to scale at $15.9m revenue for the quarter (run rate of ~$63.6m p.a.).
  • There's no mention of EBITDA except for the fact that the brands division is now EBITDA positive, following a re-structure
  • Overall adjusted net cash from operating activities is positive at +$0.6m (-$4.7m + $1m one-off professional service fees relating to the acquisition + $4.3m due payments the majority of which have now been collected). That's only marginally CF+ though, it is important that we see net CF continue to improve next quarter.
  • (*) Revenue for THM is $4.2m. If you annualise that you get to ~$16.8m which is a significant shortfall from the $25m which was forecasted for FY22. This is because the Winter quarter is a seasonally low quarter. That explanation makes sense to me (and aligns with historical website visitor data), but is something to monitor going forward. It is important that we as shareholders see THM revenue increase in the next quarter as we enter the higher performing (warmer) months of the year and particularly the Q4-CY22 (Oct, Nov, Dec) quarter, which should be a bumper quarter for sales.


In the F&B sector, where you have ~50% of all of the ASX listed entities unprofitable (many burning significant amounts of cash) yet many at much higher valuations, this result to me reflects the asymmetric risk/reward opportunity with HLF. However, it is important that i) Halo continues to be net cash generative going forward, ii) pays down its debt and iii) can continue to profitably grow, with operating leverage. If that happens, the business has a bright future. Not out of the woods yet but this is hopefully enough for the market to regain confidence that the THM business is not a fad and is instead a genuine cash-flow generative business.

$20m market cap. $83m sales run rate. Marginally CF+ (if adjusted for late payments) — it will be very interesting to see what Mr Market makes of this, come Monday, relative to the expectations that are baked into the share price. As a very rough back-of-the-envelope calc, assuming a 10% EBITDA margin and 6x EBITDA multiple; I get a fair value revenue multiple of 0.6x.

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#Upcoming Quarterly
stale
Added 2 years ago

I suspect management is hoping that they'll let the numbers do the talking. With a market cap of merely A$21m at 5.3c/share, there could be a serious re-rate on the cards if HLF reveals a cashflow positive result (and/or strong EBITDA) in the upcoming quarterly, which is due by the end of the week.

I'm taking a cautious approach, however. Results have generally been below expectations on the cash-burn front across the last 12 quarters. Although to be fair, Q3 FY22 (AKA Q4 CY21) was an absolute standout quarter producing a cashflow positive result for the first time.

Trailing twelve months (TTM) net operating cash burn is also improving from a trough of -$10.2m in Q2-CY20 to -$3.9m as of Q1-CY22. With the addition of The Healthy Mummy (THM) financials for the first time this upcoming quarter (Q2-CY22), we may see more than A$21m in revenue for Halo this quarter alone, which is more than the current market cap, indicating a price to sales ratio (PSR) of < 0.25.

Looking forward to the results.

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#THM Website Traffic
stale
Added 2 years ago

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The Healthy Mummy (THM) website visitor numbers are up 45% since March (272k in June v 188k in March 2022). Hopefully, the LTV/CAC ratio is holding up. I'm looking forward to seeing the THM financials at the end of this month. If THM is tracking above $20m p.a. at the top line and $5m p.a. EBITDA, we might see a combined Halo (HLF) quarterly revenue of ~$20m and slightly positive EBITDA. If that is the case, HLF will be trading on 0.25x rev ($20m revenue for the quarter versus a $20m market cap). Ideally, the quarter will also be CF+, although I'm cautious about that because there will be some one-off integration costs.

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#Ratio Analysis
stale
Added 2 years ago

Generally tracking in the right direction here in my opinion. If Halo can shift into profitability this financial year (FY23, noting that they operate to a 31st March year end) with the contribution of the Healthy Mummy business, this is likely to be the catalyst for the share price moving forward. The progression of the free cash flow margin from FY19 to FY22 highlights that this business is now right on the cusp of breakeven. I'm significantly underwater here but continuing to hold. $20m MC.

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#THM Update
stale
Added 2 years ago

The global and country website rank for The Healthy Mummy (THM) is slightly down for May 2022 v April 2022, but the overall traffic numbers are holding up well at 258K visits globally across mobile and desktop (see below). The Australian winter is traditionally the lowest point in the business cycle for The Healthy Mummy (people particularly want to get in shape during summer!) so I'm ok with this progress from the team. I'm looking forward to seeing how the June and July website visitor numbers turn out. Moreover, I'm most interested in seeing the THM financials (revenue, EBITDA and CF) in the next quarterly report (4c), which is due to be released at the end of July (for the 3 months ending 30th June 2022). At a $22m market cap, I can only assume that the market expects that the upcoming financial year (FY23) will present another loss. Personally, I believe the odds of a bottom-line profit for FY23 to be reasonable... therein lies the opportunity. THM is set to deliver somewhere between $5m and $6.5m AUD in normalised EBITDA for FY23 based on guidance. HLF will have some integration costs in this next quarter, but I'm not expecting D&A to be material for THM over the year. Thus, there is a reasonable chance that THM's EBITDA for FY23 will drop down to EBIT. Nothing is guaranteed here. But, I think this is a (very) asymmetric bet at a 6c share price. In an uncertain world and when investing, that's all you can ask. There's no such thing as a sure thing, but you want the odds in your favour. EBIT of just $4m AUD puts HLF on an EV/EBIT multiple of 8x at the current price.

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#DCF Model
stale
Added 2 years ago

Below is an extract of the 3-statement DCF model that I have put together for Halo Foods.

I'll update this again once the formal FY22 (31st March year end) results are released in the next few days.

I'd love to get perspectives/feedback on the assumptions I have used (in the HLF strawman forum) and we can tweak this to zero in on a fair value estimate.

On the following assumptions, with this DCF (FY23 to FY26 forecast period + terminal value), I arrive at a 22c fair value target:

  • Revenue growth rate of 15% in FY24 slowing to 10% YoY in FY26
  • COGS as a percentage of revenue drops to and remains at 70% (from 80%) following the THM acquisition (FY23 and beyond)
  • SG&A as a percentage of revenue drops from 31% in FY20 and 26% in FY21 to 20% by FY26
  • Marketing expense (as a percentage of revenue) increases from 1.6% in FY21 to 2.0% in FY26 (extra marketing associated with THM)
  • WACC of 9.4% (beta of 1.96)
  • Terminal growth rate of 1%


Although I am very cognisant that I have been wrong on the timing of this investment so far, 21c presents potential upside of 289%. I remain invested here with ASX:HLF.

A model is only as good as the assumptions underlying it. Please feel free to suggest alternatives (bear case / bull case assumptions) and I am happy to run it through the model to see what sort of targets are generated.

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#FY22 Result & Yearly Trend
stale
Added 2 years ago

As highlighted by Strawman, what matters most for any stock is performance on a per-share basis. Below, I've presented the absolute numbers and also the per-share numbers for both the top line (revenue) and the bottom line (NPAT). For the FY22 result (12 months ending 31st March 2022), I've used 274m shares on issue (SOI) because The Healthy Mummy financials (~$25m revenue and ~$4m profit) are not included in the FY22 result. From FY23 onward, the THM financials will be included in the Halo result, and thus it makes sense to use 400m shares on issue from that point onward, as the additional shares were issued for the purpose of acquiring THM. Importantly, although this FY22 result was not yet NPAT positive, it has improved from a loss of $8.2m in FY21 to a loss of $3.9m in FY22. It's of course a business with low margins (that's contract manufacturing for you), which partly explains the extremely low valuation ($24m market cap). But, on these top-line and bottom-line figures, it is a valuation that I think has grossly underestimated the potential of this diversified health & wellness company. The share price drop today to 6c was another kick in the guts but I personally retain the view that this investment has the potential to be valued at $100m+ in the next few years. I might be completely wrong -- time will be the ultimate arbiter.

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#4th Qtr Results
stale
Added 2 years ago

Sales for the 4th quarter (FY end is 31 March) were $14.7m --12% higher than the previous 4th quarter, but 15% lower than Q3 (this was due to unusually high absenteeism due to Omicron which delayed manufacture and dispatch).

That being said, the final month of the quarter was a record for the company, and represented almost half of the total sales for the entire quarter. The company says this shows good momentum going into FY23, but it maybe also represents some catch up from the covid delays described above.

For the full year, FY22 delivered $59.9m in revenue, which is an 18% lift on the FY22. This does not include any contribution from the Healthy Mummy (THM) Acquisition which was consolidated into the company on April 1st.

That's a strong lift, but it's also worth noting that on a per share basis, sales went from 18.6cps in FY21, to 14.9cps in this latest year. Of course, the lift in shares is associated with the acquisition of THM, which last year delivered around $21m in sales -- so if you account for that sales per share come in around 20.2c -- around 9% higher. Not bad, but half the growth that management highlight (remember, our ownership currency is on a per share basis).

One area of concern was a 40% lift in raw materials cost (hello inflation!) and a rise in staff costs as casual labour was employed and overtime incurred to mitigate the covid related absenteeism, but these employee costs should normalise going forward.

The company did improve its cash burn despite these challenges -- with the business down $3.9m compared to $8.2m in the prior year. It still has $8.9m in the bank.

THM, though not captured in this reported period, did see a 13% uplift in revenue for March compared with a year ago. Digital subscriptions were up 22% and app downloads were 40%.

There's a lot more detail that you can dive into in the actual ASX announcement (here)

But all told, you have a business on something like $80m in forward annual revenue, currently trading at around $24m market cap. Of course, it's still sub-scale and is very much a low margin, volume dependent business -- and one facing cost pressures and that operates in a cyclical and discretionary sector. Still, @TEPCapital has laid out a good case and there certainly seems to be a good margin of safety in the price.

I hold a small parcel on SM and in real life.

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#Shareholder Register
stale
Added 2 years ago

I've had to blank out the names below, sorry, because I am not allowed to share the register publicly. But, my takeaway from this is that the T20 is in a reasonable position, with VC & Bergen the only major exits since the THM acquisition was announced (2 others also left the T20 since Dec but were also only recent additions to the register, so were more likely to be traders with stop losses). We've got a number of new additions to the T20, with the threshold to enter the T20 increasing (2.2m units as opposed to 1.4m units back in Dec last year). There will be a lot of churn here from holders/traders/legacy investors outside of the T20. It is always hard to turn a downtrend around. It takes time. Unfortunately, most retail investors who are only loosely following the story will simply be relieved to get back to breakeven and may sell when that happens, and thus the register will have to churn out many uncommitted investors on the way back up. Regardless, I really like the risk/reward balance at these levels in the context of $6.5m EBITDA for FY23 versus a market cap of $26m. Let's see where we get to 12 months from now.

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#Q4-FY22 Prediction
stale
Added 2 years ago

I think the upcoming quarterly (Q4-FY22 // Q1-CY22) is going to be CF negative (ex-THM), but have my sights set on FY23 full-year results (incl. THM). I suspect this because HLF has indicated in the THM investor pres materials that the forecast for full-year FY22 revenue (ending 31st March 2022) will be $60.1m (ex-THM). Given HLF has achieved $46.9m in the 9 months of FY22 reported to date, this implies the Q4 result will be circa $13.2m in revenue (ex-THM). This compares to $17.5m in sales for the recent record Q3 (quarter ending 31st Dec 2021). Given the quarterly COGS has been averaging around 86% of sales, I'd expect $1.85m in gross profit for the quarter (ex-THM). This will be less than the SG&A costs (c.$2m for staff costs and c.$600k for admin & corporate costs). Further, admin costs for the THM acquisition will be in addition to this. So, I'm guessing we will see a cashflow negative result in the order of negative $0.75m for the business ex-THM (before acquisition costs: i.e the result will be worse after acquisition costs are incorporated). In terms of why the quarter is indicated to have lower sales than last, my best guess is that the Theland China contract is yet to see its second major order. That would account for around $2m AUD of the expected $4.3m AUD gap. Opening orders of USD1.5m were received and manufactured during Q3 FY22. However, the second Theland order was scheduled for late February (indicated here), and thus the bulk of this will fall outside of Q4. The new deal with WFresh Limited will also fall outside of the 4th quarter. As to the rest of the revenue gap ($2.3m), perhaps that is due to the loss of a contract (Walmart) or due to timing factors in orders. The CM business is somewhat lumpy.

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#Overhang
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Added 2 years ago

Not long to go now.

For James Gong, no further substantial shareholder notices were released from March 2021 onward, when he ceased to be a substantial shareholder (sub 5%). Yet, as of the 10th of Dec 2021, I am aware that he is no longer in the Top 50, so I have assumed a somewhat linear decline of his holding between those two data points.

As of the 22nd of March 2022, I have VC at 4,785,306 units remaining based on a T20 report. The other data points below for VC are based upon substantial shareholder notices prior to VC moving under the 5% threshold and based upon T20 reports post VC's fall under the 5% threshold. (Note: for those wondering, the increase in shares held by VC & JG in March 2021 was due to the grant of performance rights, not on-market buying).

Cumulatively, over the past 12 months, over 36m HLF shares have been sold by these ex-management team members that were removed from their positions by the board of the company, following the reverse takeover of Omniblend. There may be many valid reasons for this selling, such as diversification, but when emotions and ego are involved, it is difficult to act rationally.

36m is a very meaningful amount and although it is not the only reason behind the share price decline over that period, it is certainly a major contributor to it. Psychologically, knowledge of an overhang reduces buying demand and accentuates selling pressure from other holdings. But, the shares sold have largely gone into the hands of individuals, like me, who see value in the company at this price ($28m MC at 7c).

We are coming to an end of an era, and possibly, a new chapter for the share price. If I had to guess, I'd imagine a stabilisation around 7c levels, followed by a rise back to 10c (the placement price) across the next couple of months. Beyond that, the share price of HLF will increasingly be driven by the earnings profile of the business, in which they indicate $6.5m in EBITDA for FY23.

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#EBITDA Multiple: Plug & Play
stale
Added 2 years ago

Those who have been following along with the HLF T20 will know that VC had ~13.7m units prior to the THM acquisition and now has ~7.7m units remaining (as of the start of this week). Let's estimate another 3m units from VC was sold this week (there were two major dumps of 1.5m shares each, including one today), which takes her holding to ~4.7m units remaining. That goes part of the way to explaining the deep decline in the share price since the acquisition.

Anyone buying in now ideally should be doing so with a long term mindset, ideally of at least a 12 month+ time horizon because it will take some time for the register to reset. For those that do, I personally think your chance of doubling or tripling your money from these levels over that time period is reasonable, as per the below. Of course, that's purely my own view and not financial advice; do your own research, seek a financial advisor etc. etc.

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#Risks
stale
Added 2 years ago

Article in today's Australian "Cash ban for online health spruikers"

https://www.theaustralian.com.au/nation/cash-ban-for-online-health-spruikers/news-story/5c02b45e705e7e76ab1cc1f2c70c0401

I wonder what the impact will be for advertising for HLF and costs for THM marketing.

The New Code clarifies the position. 

  • Paid or incentivised testimonials, regardless of whether any payment is disclosed, or the testimonial is genuine, are prohibited.
  • While genuine unpaid testimonials are permitted, under the New Code, influencers, direct sellers and anyone else who receives “valuable consideration” for their testimonial are taken to be persons “involved with the production, sale, supply or marketing of the goods” (and therefore prohibited from providing testimonials).
  • “Valuable consideration” is broad and would include non-monetary items such as services, gifts, opportunities, or any other incentive. During a webinar on 17 February 2022, the TGA indicated that all advertising that includes paid or incentivised testimonials that is currently live and accessible (including on social media) will need to be taken down by 1 July 2022, even if uploaded prior to that date.
  • Brand ambassadors can endorse a therapeutic good (that is, provide an expression of support for a product or brand) provided the endorsement does not refer to the person’s personal experience using the good (which would amount to a testimonial). Endorsements must also meet specific requirements under the New Code. For example, if the endorsement refers to health benefits, the endorsement must be typical of the benefit that can be expected from the goods when used in accordance with the label and the approved indication and use.
  • The New Code also prohibits endorsements by particular people and organisations, including brand ambassadors who represent themselves as having expertise or qualifications in a health-related field, current and former health practitioners, and medical researchers.

https://www.kwm.com/au/en/insights/latest-thinking/major-changes-to-the-therapeutic-goods-advertising-code.html

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#CEO Buying
stale
Added 2 years ago

Following on from the news that the Chairman bought a few days ago, HLF CEO, Danny Rotman, has picked up 230,000 units at an average price of 8.6c per share ($19,780), as of yesterday, which brings his total to 3,136,977 full paid ordinary shares.

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#Chairman Buying
stale
Added 2 years ago

454,550 HLF shares were acquired yesterday at an average price of 8.7c on-market by Non-Executive Chairman Peter James, for a total consideration of c. $40k AUD. Peter James will also be taking up his full SPP allocation (another $30k AUD) (as will all of the eligible Directors). Intriguingly, the timing of this also happens to coincide with the removal of the VC & JG overhang (former management).


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#Acquisition of THM
stale
Added 2 years ago

News was out today that Halo Foods (HLF) is acquiring The Healthy Mummy (THM). Here's my attempt to make sense of this:

  • Combined revenue of ~$84 million and normalised EBITDA of ~$5.7 million (pre-synergies)
  • Implied acquisition multiple of approximately 4.1x EV / FY21 upfront EBITDA and 3.4x EV / FY23F blended EBITDA (assuming top earnout threshold is met) [that's not bad considering recent acquisitions/investments in the space, such as 'The Man Shake' by Pacific Equity Partners for 12x EBITDA]
  • I don't think this is a short term fad. I think the weight loss programs are likely to become more popular with time
  • The strategy here is to extract operational efficiencies and scale benefits
  • THM’s mission is to help millions of mothers around the world who want to lose weight after having children
  • THM has a high margin subscription digital product offering, which is feeding product sales. Appears that the subscription (to the 28-day challenge delivered by the Healthy Mummy App: 86k subscribers) provides around 40% of their revenue and their products (mostly smoothie powders, nutrition and skincare) provide the remaining 60% of their revenue
  • This online subscription offering (which has a fairly strong Trustpilot rating & App store rating) could provide substantial cross-sell opportunities for Halo brands (such as Tonik)
  • THM appears to have a partnership with Priceline (physical stores and online) which supply their products
  • THM can bring their manufacturing of core products in house via Halo's facilities (Melbourne & Sydney) – estimated $4-5m of contract manufacturing to be brought in-house
  • THM has higher-margin, proprietary brand sales to lift Halo's existing sales mix and profitability. Proprietary products currently comprise about 10% of HLF's revenue but this should rise to something like 40% post-acquisition. This should lift the gross margin of the business, which is currently around 20% for HLF contract manufacturing (v 60%+ for THM).
  • Across the F&B sector, brands with higher margins are often rewarded with higher valuations (i.e. A2M/Tassal/Select Harvest v Inghams/Bega/FarmPrideFoods); thus I don't mind this strategy at all
  • The acquisition and associated costs will primarily be funded through a combination of equity ($6m) and debt ($13m).


Post-acquisition, what we should see is a strong deleveraging profile underpinned by synergies and organic growth initiatives. For a combined business that is doing $84m rev and normalised EBITDA of $5.7m, I think this business deserves to be valued on a minimum of 1x rev or circa 15x EBITDA for a market cap of around $85m AUD. SOI will rise from 274m to 384m units. That's a short term target of 22c (85/384).

An acquisition is often only suitable under certain conditions, one of those being that the acquisition is earnings accretive: having looked over the financial profile of the business, this is indeed very much earnings accretive. I hope that means the market will get behind this.

I like the numbers but I'm not a huge fan of the product (but I guess I'm not in the THM target market either!). The main risks are that THM fails to reach its financial goals, that it distracts from managements focus or that there is an excessive reliance on key personnel. There will likely be an initial knee jerk reaction on Wednesday when this news is formally out and the trading halt is lifted and then there will be the more measured share price reaction in the weeks thereafter.

Word on the grapevine is that the placement closed early, oversubscribed.

Onwards and upwards.

I'll take up the SPP.

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#History
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Last edited 2 years ago

@TEP, thanks for the great write up, and making me take a better look at this company. I don't have much to add to your analysis but I wanted to look into the history of Halo myself before I bought in as I am always a bit wary when the insiders are selling out but then found your other straw that gives a good explanation of how this has occurred and why the insiders are really disgruntled outsiders now. Without that I would have been pretty wary still.

Anyway I thought I would look into how they were going to turn around a loss making enterprise and just went back through the last 2 years of announcements to see what they have been doing and management have been pretty busy getting this going, expanding production facilities and distribution channels, winning contracts, and the turnaround while early looks pretty evident to me. They give a lot of good information are are transparent in their quarterlies so tick for a management on this. Also the name change from Keystone to Halo and the associated branding is also on point I think.

Not much new insight from me but thought this might be of interest to someone. Of note is that they haven't made a bad announcement in this whole period.

Timeline of what they have announced to the market since Nov 2020-

9-11-2020- Milk powder supply agreement 2yr term, then ongoing option – NZ$7.1

18-11-2020- Expanded distribution network for Tonic products

24-11-2020 – Increased sales order from Nouriz China NZ$3.1M forecast upgraded from 2.5M

7-12-2020 – Awarded Coles private label tender - $5.2M

29-1-2021 December quarterly (Q3)- 12.6M sales – $90K cashburn

5-3-21 – 16.5M performance shares issued to Keystone owners (who are selling out)

20-4-21 FY21 revenue results – 50.7M revenue (up 125%)

30-4-21- Quarterly – cash burn $3.065M

24-5-21 – triple sales to Walmart China for 5 months to May vs pcp (3.3M vs 1.2M NZ$) + a further 1.4M in next quarter.

26-5-21 Launched Tonik energy

16-7-21 Debt financing in place – NZ $1M, $7M Aus 9.8M available to drawdown on.

26-7-21 Coles contract execution - $800K first 2 months

30-7-21- June Quarterly cash burn $1.036M

19-8-21 Supercubes plant based bars stocked nationally by Woolworths

30-8-21 New milk powder supply into China – through Theland- $1.8M for Dec quarter

2-9-21 Strong order growth for their upgraded and expanded snack and bar manufacturing plant. >2M initial orders

29-10-21 – September Quarterly 15M sales and 13.3 cash receipts (5.7M of sales in September alone) cash burn 2.27M

9-11-21 Change name from Keytone to Halo

10-11-21 $40M (US$) partnership with Theland to sell powdered milk products into China, 2 yr term. Initial US$1.5M manufactured by end of Nov 21

12-11-21- Awarded 2nd Coles private label tender start 1st quarter 2022 - $3.3M/yr

30-11-21 – H1 results 27.8M revenue – net loss of 2.8M (3M in 2020)

31-1-22- December quarterly (Q3) 17.5M revenue and positive cashflow of $2.6M


I also liked this chart from their annual report, I would rather profit but revenue is a good starting point. This year (FY22, they end in March) they are currently at 44.8M revenue for FY22 (Q1- $12.3, Q2- $15 Q3-$17.5) and based on the way they are reporting their contracts and Monthly records - September was a record -$5.7M, then November -$8M. its not too much of a stretch to think Q4 might see 20M and they should comfortably exceed 60M revenue for the year.

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#Technical Analysis
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Added 2 years ago

Thanks @TEP.

Always look forward to your highly knowledgable input.

I have never got into TA, but realise it must have a place in investing.

Regarding the SP graph and the various points your draw:

  • would it be fair to say the there would have to be compression of these ribbons? The only way they could not compress would be if the SP somehow became negative - otherwise the downward slope is going to have to level off?
  • This is in no way meant to subtract from your otherwise excellent thesis on HLF!
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#Technical Analysis
stale
Added 2 years ago

I've always been more of a fundamental investor, not a technical trader. But, the truth is that chart patterns are not random, they are the footprints left by smart money.

There are those doing the hard work, running the analysis, pounding the pavement and speaking to management before they dare to take a position and these are the people making the footprints. Then there are those observing those footprints (technical traders) by looking at price action.

Regardless of whether you choose to use technical analysis or fundamental analysis in your investing decisions, it pays to know what the market is thinking. It pays to look for these footprints.

Below, we have a MA Exp Ribbon chart and what I believe is a pothole setup: we've had a long downtrend, from 2019 through to June 2021. At this point, the bears want to see the stock continue to drop, but bottom fishers like me see deep value.

At this point, buying demand keeps the stock from dropping much further. A stalemate emerges with neither the bulls nor the bears winning so the stock just lines sideways (June 2021 to Jan 2022).

Just before moving higher, there is a final piece of capitulation selling (the pothole: it was at 10.5c) and the setup is then complete, allowing the stock to climb and climb and climb.

11ec81ffaac56deedeb54a7680d8dc07c50206.png

Moving average ribbons are a series of moving averages (MA) of different lengths that are plotted on the same chart to create a ribbon-like indicator.

Traders can determine the strength of a trend by looking at the distance between the moving averages, as well as identify key areas of support or resistance by looking at the price in relation to the ribbon. The ribbons can also be used to signal potential trend changes when the price moves through the ribbons, or the ribbons cross each other.

In this case, after an extended period of sideways movement (consolidation), HLF appears to be breaking out from the pothole setup. When the price is above the MA ribbon, and the MAs are angled upwards, it helps confirm a rising price. This indicates an impending breakout.

We are also very close to a golden cross. Plotted below is the SMA20 (red line), SMA50 (black line) and SMA200 (green line) on a daily chart. We can see the share price is holding just under the SMA200 level and the SMA20 (red) has turned up and crossed above the SMA50 (black).

A golden cross is the move of the SMA50 (black) above the SMA200 (green). That is probably the single best charting method to confirm/claim that a new uptrend is now in place. From a fundamental analysis perspective, the best indicator is probably the shift into EBITDA positive territory and that has already happened.

a8746e97ab91079496b3434612e4b4cdf8b6eb.png

What I am interested in here is that the overall TA picture is confirmed with FA action (clearance of the overhang from James Gong and Vivienne Cheung and a record quarter on all metrics, which highlighted the crossover into profitability and the effect of high operating leverage kicking in).

I've been quietly building a position across the past 6 months anticipating this breakout and a rerate back to a fair valuation. My average is circa 15c currently (15c equates to a MC of A$40M) (Note: The IPO in 2018 was at a $30M valuation and at that point they were only doing A$2M revenue p.a. versus A$17.5M in the most recent quarter alone!).

I believe the share price should run quickly back to 22.5c (purple line) as a starting point on fundamentals, now that the overhang is cleared and the pivot point in profitability has been hit. With 274M SOI, 22.5c is a market cap of A$61M. That's a conservative 12x multiple of estimated FY23 EBITDA of A$5M (the ASX F&B sector trades on 15-20x EBITDA on average) and 0.87x Q3-FY22 run-rate revenue (A$17.5M x 4 = A$70M).

Additional catalysts include an update on the A$54M 2-year Theland China deal (most likely Feb) and another quarter of profitability & rising EBITDA in the 4th and final quarter of FY22 (HLF operate to a March 31st financial year-end) (end of April).

A fair short term target might be a A$100M market cap (36c) following another quarter or two of rising revenue, EBITDA & CF. I'll be looking to take some profit off the table at that point.

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#Overhang Almost Cleared
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Last edited 2 years ago

I've never been more pleased to see a "ceasing to be a substantial holder" notice in my life.

The damage that JG & VC did to the share price of this company was extraordinary, selling out of spite, due to the reverse takeover of their original business (Omniblend & Keytone Dairy).

Now comes the exciting part: a rerate of the share price back to normality in line with revenue & earnings growth (intrinsic value). I'm pretty sure I won't be the only one buying tomorrow.

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#Q3 FY22 Result
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Added 2 years ago

Stellar Q3 FY22 quarter, congratulations to the management team.

The net cash flow from operating activities of $2.6M is outstanding. But CF varies quarter to quarter based on the timing of receipts and working capital needs, and so I was even more pleased to see group EBITDA continue to climb to $503k, up from $216k in the previous quarter (Q2 FY22) and up from a loss of -$265k in the prior corresponding period (Q3 FY21).

The sales pipeline is very robust too moving into Q4-FY22, with some great updates in the quarterly: "a number of clients have indicated increased volumes and additional SKUs over the coming 12 months, with forecasts to be provided in due course."

EBITDA is currently running at an annual run-rate of c.A$2M and growing at 134% per quarter. Even on today's progress alone (and not factoring in the incredible growth trajectory, with operating leverage kicking in), HLF is currently worth $30M at a 15x EBITDA multiple. That's the current market cap.

When you start to project forward a couple of quarters, one can envisage HLF hitting quarterly EBITDA of $1-2M this calendar year, equating to annualised EBITDA of $4-8M. That would provide a fair valuation of between $60M to $120M in the short term (on a 15x EBITDA multiple), compared to a market cap of just $30M today.

The investment thesis is starting to play out: I believe this is a multi-bagger in the making.

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#Industry/competitors
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Added 2 years ago

Thx @TEP. It was so far away I missed it!

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#ASX F&B Industry
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Added 2 years ago

Hi Chagsy,

Halo is at the far right of the chart, with a 188% top-line CAGR across FY18 to FY21. A fair multiple (valuation) is not being applied to Halo for a couple of reasons, but it is primarily a result of the share overhang, which is almost resolved.

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Interestingly, when one examines the 50 or so entities comprising the ASX F&B sector, a tale of two halves is revealed: profitable stocks (mature value, mid-growth, and high-growth) versus the unprofitable players (high growth, concept stocks and under-performers). Halo Foods is on the cusp of this transition into the profitable end of town where valuations tend towards 1-2x revenue at mid-quality and 2-4x revenue at high quality. 

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I believe that Halo Foods may have a ticket to parties in the blue-end of town soon.

T.E.P.

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#Industry/competitors
stale
Added 2 years ago

Hi TEP

which bubble is Halo? Or am I being dim?

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