Thread by @DownunderValue

Cobram Estate $CBO $CBO.AX is Australia’s largest olive oil producer, set to IPO tomorrow on 11 August 2021.

A market leader in a growing industry, here are five reasons I won’t be chasing this IPO.

Let’s take a deep dive.👇

For some context, Australia is a minor producer of olive oil compared to the undisputed global champions in southern Europe.

Much of the industry is fragmented, with nonnas having a few hectares of olive groves, though there are a couple of larger players.

1. The total market is growing at an anemic rate of 1% CAGR. While Aus 🇦🇺 and the US 🇺🇸 is higher around ~3%, it doesn’t pass my “baked beans CAGR” benchmark of 4%.

If the market is growing slower than baked beans, then the bet is more about taking market share. 🥫

2. Increased global competition and changing consumer habits is driving down margins.

While Moro is only 24% of value, it’s 31% of volume. Conversely Cobram is 35% of value, but only 30% of volume.

Another way you see this expressed is the increasing proportion of sales going through lower-margin channels, such as Red Island (less premium version of Cobram Estate) and private labels (supermarket’s own brands).

3. With current margins, normalised FCF may actually be negative – at the least, it’s very fragile.

Total expenses has been greater than sales revenue in FY19, FY20, and breakeven in FY21f (due to abnormally cheap water and lower marketing costs – neither are sustainable).

🚨Indeed the prospectus also includes adjustments in fair values (asset price changes) as revenue – this obviously doesn’t show up in the cash flow statement, and is the basis of their statutory profits. 🚨

And here is the cash flow statement. To be fair to Cobram, they have been investing in the US which has eaten up part of their cash flow, but also worthwhile noting that cash flow from operations is at cyclical highs (high production every two years, low water costs in FY20).

4. Over the long term, they haven’t accumulated significant amounts of net equity or retained earnings.

🚨The prospectus provides a long history of the company and production, but not the financial statements. 🚨

In fact, their net tangible assets is ~$150m (PPE less debt).

This probably sets the floor of what the company may trade at (40c per share, $150m/387m shares outstanding). I suspect the IPO will be significantly higher than this, meaning it will not be an asymmetric bet.

5. Finally, if a prospectus has disingenuous information, that’s a red flag for me.

Repeatedly they claim to be efficient producers, but they don’t provide their actual cost of production figures. 🤷

Moreover, they claim they “8.9x more olive oil per hectare” – though they use intensive irrigated horticulture and are comparing to largely dryland cropping. Using a per hectare measure is dubious, and they should be presenting cost per tonne produced.

To labour the point, Cobram have ~155 trees/hectare, while traditional dryland is ~100. Irrigation is expensive and can cause salinity in the Murray Darling, while Nonna prolly has 0% WACC.

Without knowing the cost of production in a commodity market, one is investing blind.

h/t @tristan @lachlanbjensen @StefiTrenberth who have commented on Cobram or discussed it directly with me.

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A deep dive per week is my commitment to FinTwit.

Questions and feedback always welcome. DYOR.

Disclaimer, I have no position in $CBO.

@Tristanwaine was whom I meant to hat tip, oops.

Update: I listened to their presentation, and they did discuss their efficiencies as '30% lower cost of production to weighted average industry costs' which was useful.
They also noted US will be ~5% of Aus production once trees mature, not a huge growth runway.