Why are these guys investing in the trainwreck of Murray River Group?
Food & Agriculture
Food & Agriculture
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Stockhead has been keenly covering the reality TV-esque dramas of ill-fated Murray River Group for 18 months, and after its life-saving fundraise last year noticed some interesting new investors pop up on the register.
Tech investor Thorney (ASX:TOP) was in there as was Cyan Investment Management, which is run by one of Stockhead’s resident experts Dean Fergie.
Murray River has been forced into multiple earnings downgrades and crop downgrades, it’s seen three serious attempts at board overthrows — one successful — and in its two years on the ASX has thus far failed to make money for investors or itself.
We were curious as to what these sophisticates saw in what has been one of the ASX’s biggest trainwrecks since it listed in late 2016, so we ran upstairs to see Dean.
Stockhead: Murray River has been a trainwreck…
Dean Fergie: Oh a disaster.
Stockhead: Why are you guys invested in it then?
DF: It’s certainly one of our more speculative investments. But we reckon that in any investment you’ve got to weigh up your upside and downside, and we’re buying this at absolute bottom of the market. Can you still lose some or all of your money? Of course. But you’ve got to chance of actually making a multiple of that.
Stockhead: What do you see in it? What lured you in?
DF: Net assets, before they raised the $30m last year, amounted to about 15c a share. Because of the dilution that’s down to about 12c so you’re buying inventory farming equipment, land, minus debt, at about net asset value [the stock closed Wednesday at 11.5c]. You could also argue you’re not paying any goodwill for any of that stuff either.
You’ve had assets that have been mismanaged, they’ve just got all this farming land that hasn’t been properly irrigated, they’re not getting the yields, everything that could have gone wrong has gone wrong.
Previous management wrote some pretty s..t contracts. They’re selling stuff in Aldi and apparently it’s a terrible contract, they’re basically making no money. And they’ve had all of these manufacturing and packaging issues.
And you have a stock that’s gone from $1.30. They raised money along the way at 30c and then at 10c when they said ‘please let us survive’.
Stockhead: that doesn’t exactly sound promising.
DF: I think there’s every chance they can turn it around.
They’ve got a market cap of $50m, they’ve got $70m in sales, $55m-60m in net assets, and a banking cohort that’s said we’ll give you three or four years of funding.
The board of directors is gone, the management team is gone, and the new people look like they’ve got real experience. Andrew Monk is part of the Organics Association and Valentina Tripp looks like she’s got a really good background in finance and fast moving consumer goods.
They’ve got assets, they’ve got sales, they’ve got clients, so if you want to make a few tweaks you can turn if from being unprofitable pretty quickly.
Stockhead: Are they making those tweaks?
DF: It would appear to be the case. It’s still too early to tell because they’ve only had the money since late last year. They’re making the right noises in terms of progress like putting through price rise for farmers.
No one expects it to be profitable this year, but we think it’s likely they’ll have a base to turn the loss making business into a profitable business in 2020.
Stockhead: What could trip them up?
DF: Heaps of things. One you’ve got to worry about is domestically you’ve got very powerful retail environment. There are three or four big players who say we’ll set the rules, thanks.
Where Murray River has an advantage is it’s a niche product, it’s certified organic. They’ve got some pricing power and there’s limited supply.
Stockhead: Should we be covering our eyes when the full year report comes out?
DF: If they can ramp up their sales, if they can go from $70m sales a year to say $90m or $100m, they should be able to make EBITDA margins of at least 15 per cent.
The company said they want to turn an underlying loss of about $14m into an underlying loss of about $3m this year. Maybe next year they do $5m-$7m in positive earnings?
It could be 30c a share pretty easily, that’s our medium term view.
Dean Fergie is the director and portfolio manager for Cyan Investment Management.
Dean has more than 25 years experience in the funds management industry covering all major asset classes. Over the past 15 years he has specialised in small cap industrial ASX listed companies. He holds formal qualifications including Master of Applied Finance and Bachelor of Engineering (Civil). Dean has lectured for the Securities Institute of Australia and is a Graduate of the Australian Institute of Company Directors.