Rare Foods Australia investors will be salivating after reading the latest MST Access analysis on the globally unique business producing top of the range greenlip abalone while seeking to diversify its premium offerings from WA’s pristine South-West region.

MST Access has released its latest research note on Rare Foods Australia (ASX:RFA) that includes a 12-month forward discounted cash flow (DCF) valuation of $0.33 – a whopping ~323% upside from the current share price of $0.078.

Even MST’s conservative cross-check implies a valuation of $0.13, which is still a hefty 67% lift.

DCF estimates the value of an investment using its expected future cash flows. The ‘Oracle of Omaha’ Warren Buffett himself explained in a letter to Berkshire Hathaway shareholders:

“The value of any stock, bond or business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset.”

Core business improvements

MST Access, which provides institutional-quality research on small and microcap companies, has based its analysis on several of Rare Foods Australia’s core business strengths.

These include record quarterly sales volumes as well as forward non-binding supply orders almost equivalent to total FY22 sales already locked in.

Alongside RFA’s strong sales, pricing is also robust. The September Quarter price was $55.70 per kg, up more than 8% on the average price in FY22 and more than 26% compared to FY21.

After rebounding strongly post Covid, MST Access forecasts increases of 5% per annually over FY23-FY25 as RFA benefits from its sales and marketing strategy, with prices to reach $60/kg by FY25. It then expects continued growth of 3% annually long term.

However the research paper notes this level may be conservative given current bulk pricing as well as RFA’s strategic move towards higher levels of retail sales as it plans domestic e-commerce and sales from its Ocean Pantry retail outlet, which is set to open before Christmas.

Underpinning RFA’s sales success is its marketing strategy targeting bulk sales through master distributors who supply upmarket restaurants and retailers in their respective regions.

The company already has existing agreements with buyers from Australia, Hong Kong and the UK. To further diversity its markets, RFA is well advanced in negotiations with other master distributors in the US, Singapore, Japan and Vietnam.

The relationships with master distributors create consistent and repeat demand they for high end wild abalone, creating economies of scale while cutting logistical costs.

Importantly, in a market increasingly concerned about sustainability and sourcing of food, RFA has a unique ‘wild enhanced’ fishery in the pristine waters off Augusta on the southwest tip of Australia.

Its environmental credentials have earned RFA the Marine Stewardship Council (MSC) accreditation.

It was also this year named winner of the WA Exports Awards for sustainability and is now a finalist for the annual National award in November.

Looking to cost control, juvenile abalone purchase costs remain locked in under existing agreements with 888 Abalone to June 2024.

RFA’s improved deployment routines  have resulted in a larger number of juveniles deployed in one dive event. Deployment systems track water quality, temperature, transport cycle times and post deployment survival counts.  All are collated to prioritise further research to lift overall juvenile survival.

Deployment survival underpins overall  mortality rates that ultimately lead to maximum biomass growth.

While current operations are cash neutral with R&D support, MST Access says working capital remains well supported by the current forward order book and $1m overdraft facility with NAB.

“We expect strong sales growth, through a combination of volume and price, to lead to positive cash flow for the company over FY23,” the report says.

As RFA boosts is greenlip operations it’s also adding new products to its premium offerings including wild roei abalone and ‘ocean-cellared’ wine from the Margaret River region.

 

 

 

This article was developed in collaboration with Rare Foods Australia, a Stockhead advertiser at the time of publishing.  

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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