A cheese platter
Beston Global Food’s shares have fallen sharply over the past month as the Thailand KCG Corp deal hit a snag, and more recently, Beston announced a major equity recapitalisation at a hefty discount to the prevailing price before the announcement. We delve into the details below and update our stance.
Beston (ASX:BFC) went into a trading halt on 17 October and made an ASX announcement on 19 October of the intention to raise approximately $28.2 million via a placement and non-renounceable entitlement offer (‘the offer’). This is split between $3.3 million via the placement, at 2.5 cents per share, and $25 million via the entitlement offer, with eligible shareholders to have the opportunity to subscribe for 1 new share for every 1 Beston share held as at the record date of this Friday, 28 October 2022. Transaction costs are slated at about $1.7 million and Beston noted that it had firm binding commitments for $27.3 million of the targeted amount under the offer.
The 2.5 per share offer price represents a hefty 59.7% discount to the closing price on the ASX of $0.062 on 14 October. The depth of the discount has seen the shares move sharply lower, with the shares at the time of writing ($0.027) only marginally higher than the offer price. Fundamentals seem to have become somewhat disconnected from the share price, which can occur often when markets are highly volatile, and an unexpected announcement is made. Eligible shareholders who take up the offer fully will not be diluted.
The other factor depressing the share price has been market disappointment that the Thailand KCG Corp deal did not materialise. However, while KCG offered institutional support at a higher share price (circa 10 cents) the firm wanted to negotiate lower contract values. This would have hit profitability for Beston over the medium-term and we see Beston as prudent to avoid being pressured into the higher priced placement that ultimately would have significantly lowered medium-term profitability and almost certainly have caught up with the share price down the track anyway.
We believe the initial moves have been an overreaction and not the correct reflection of Beston’s underlying business performance and prospects – earlier in October, it provided an upbeat 1Q23 trading update. To recap, Beston reaffirmed FY23 guidance, after September quarterly sales hit a record $46.6 million high and tracked 49% higher than the previous corresponding period (pcp). The company noted “significant gross margin improvements across the business (5.2x)” versus pcp. This was attributed in large part to ongoing price increases and superior product mix.
This is in line with expectations of a strong post-pandemic recovery for the South Australian dairy company. EBITDA guidance is now $8-10 million, while revenue is expected to be at the higher end of $150-180 million.
Strong sales were mainly attributed to the dairy division consisting of mozzarella and lactoferrin. This has highlighted Beston’s strong brand reputation and is evidence of soaring global demand for food products. Another standout was the meat processing business Provincial Food Group, which has a new business development team and delivered strong sales within Australia.
Back to the offer and management has been forced to address the balance sheet debt issue more promptly due to rapidly rising interest rates, which is crimping cashflow. To be fair, not even the RBA accurately saw where interest rates were headed this year, so the big upward moves have caught many wrong footed. The bulk of the equity recap is slated to reduce debt, although Beston (ASX:BFC) plans to allocate some to high return in investment projects and a smaller amount to innovation projects.
Touching on these in a little more detail, the largest component of the proceeds of the offer will be used to reduce debt, by $16.0 million to re-set the balance sheet after debt funding was increased over the last few years to meet the challenges caused by Covid-19 – a common scenario. With interest rates headed sharply higher, this has become a more pressing issue.
Pro forma pro net debt will reduce from $48 million to $32 million, and gearing is slated to come down from circa 88% to 39% post the raise. Quarterly payments will be reduced significantly and improve sustainable cash flows, positioning BFC to pursue high-value opportunities. The re-set should also enable the company to better negotiate an improved structure for its debt facilities.
Source: Beston Global Food (ASX:BFC)
Beston has earmarked $7.5 million for high return on invested capital (ROIC) projects, falling into three silos, being vertical integration, water recycling and energy capture and steps to be taken to improve value from every litre of milk processed via yield and efficiency enhancements, effectively getting more mozzarella from the milk. Other of the projects include installing cheese shred and packing capability at the Murray Bridge site, the central storage hub and secondary processing site for Mables cream cheese. Another initiative, relatively low cost from a capex perspective, is fitting best-in-class water recycling, anticipated to have a payback of less than 1 year and with the potential to reduce water usage by 40% per annum. The current spend on water is a “7-figure sum” and the savings will be recurring.
Finally, some $3 million is slated for the bioactive protein and nutraceuticals space. Beston has given guidance that it expects to produce 16 million to 19 million metric tons of Lactoferrin in FY23. Post the raise, the company will invest in a third Lactoferrin extraction column, capable of increasing Lactoferrin production by between 6 to 8 tones with a “high return on investment.” Beston intends to accelerate commercial production of Immunoglobulins and is well advanced in trials to extract these high value bioactive proteins.
Key dates related to the entitlement offer are shown in the timetable below but are indicative only and subject to change.
Source: Beston Global Food (ASX:BFC)
As can be seen above, at this stage the entitlement offer is set to open on 2 November and close at 5pm on 22 November, with a record date of 28 October. The offer booklet and acceptance forms should go out on 2 November. We are inclined at this juncture to recommend Members take up their entitlement in full, given the steep offer price discount. We will however be providing an update after the offer opens and the booklet has gone out, along with being closer to the closing date of the offer, making our formal recommendation at that time, taking into account the prevailing stock price then and other relevant information.
The Daily chart for Beston Global Foods (ASX:BFC) indicates a break of the $0.04 support level following the 9-month consolidation period
The Monthly view of BFC indicates price currently moving below the 12-month moving average and below the historical support level of $0.04
Summary
Beston (ASX:BFC) shares have been hit by the hefty offer price discount for its equity recapitalization and as the KCG Corp deal hit a roadblock. Both are for good reason, and we see the subsequent fall in the stock price as an overreaction, considering the momentum of the underlying business performance and prospects. The balance sheet re-set and investment in high ROIC projects will further enhance the value of the business. We are inclined at this juncture to recommend Members take up their entitlement in full given the steep offer price discount but will make our formal recommendation after the offer opens, with the booklet out and closer to the close date, taking into account all the relevant details then. Members need take no action at this stage.
Short-term tailwinds for Beston include food shortages and elevated food prices, while long-term tailwinds include increasing global demand for protein and as the company scales its business.
Beston Global Food (ASX:BFC) will remain held in the Fat Prophets portfolio.
Disclosure: Interests associated with Fat Prophets hold shares in Beston Global Food (ASX:BFC).
