Noumi (ASX:NOU) UTS Equity Research Report (Recommendation: Buy)
Business Description
Founded in 1990 and headquartered in Ingleburn, New South Wales, NOU is one of Australia’s leading providers of dairy and plant-based milks, as well as nutritional protein ingredients and sports supplements, and largest exporter Long-life milk with revenue exposure of 75%+ of the Australian market through its multiple distribution channels, integrated supply chains with around 240 dairy farms, and two facilities across Australia and two locations in Asia (Singapore and China).
Key operating segments
NOU distributes to 24 countries across two main segments; 1) Plant-Based Milks; 2) Dairy and Nutritionals. Revenue for the plant-based milks is generated through manufacturing and distribution of plant-based milks, including almond, oat, soy and macadamia especially the Milklab brand being a major revenue contributor. For dairy and nutritionals, NOU processes milk and exports long-life milk domestically and internationally across China and Southeast Asia (Figure 2). It distributes their branded dairy milk portfolio, Milklab through the café channel, and manufactures nutritional ingredients being PurenFerrin Lactoferrin and consumer nutritionals featuring brands such as Vital Strength, Uprotein, and Crankt. Costs for both segments fluctuate depending on macro-economic conditions such as increase/decrease of farmgate milk prices, rising costs of labour, transport and energy, supply chains disruptions, geopolitical instability and changing consumer preference.
Strong moat with Milklab brand
As an alternative milk manufacturer, NOU has brand identification and maintained customer loyalty through their café channel with their Milklab brand, taking in consideration the coffee culture in Australia. This established a symbiotic relationship between NOU and Café owners. For quality, NOU has been awarded for best Australian manufactured product with it Milklab Mini’s (Almond and Oat).
NOU’s recurring revenues and history of growth
A key factor in NOU’s success is its strong relationships with baristas and consumers domestically and overseas. Over the years, group revenues have shown strong growing recurring revenues due to repeat business using their brand. They have wide distribution networks with McDonalds, Starbucks, Woolworths, and Officeworks. Future growth is ensured, as per capita consumption continues to increase, and NOU’s future for expansion into international markets.
Industry Overview
To form a view on the soy and almond milk production industry, we have researched and gathered information sourced from IBIS world.
Quantity growth industry life cycle - Positive
Industry contribution to GDP is rising, due to consumer trends around personal health. Market saturation is low as it is estimated to be 31 non-dairy milk producers in Australia, under half the number of dairy milk processors.
Independent cafes are supporting wholesalers - Positive
Wholesalers often purchase products from the industry’s major producers to sell to hospitality businesses. Food-service establishments include cafes, restaurants and takeaway food service outlets have looked to wholesalers to expand their selection of plant-based milks to match consumer demand trends. Soy and oat lattes are popular beverages in Australia’s two largest capital cities, Melbourne and Sydney have become a complementary part of Australia’s coffee culture over the past decade.
Substitutes – Negative
Australian non-dairy milk producers face strong competition brands that have already established strong brand recognition. This includes Swedish brand Oatly, Califia Farms from the United States and Minor Figures from the United Kingdom. Plant-based milk competes heavily with dairy milk. Dairy milk consumption per capita in Australia is currently estimated at 93.5 liters. This compares to 6.1 liters per year for plant-based milk.
Suppliers – Negative
Plant-based milk inputs like soybeans, almonds and rice tend to be volatile. Soybeans are used in biofuel production, which contributes to world soybean price volatility. Movement in foreign exchange values also adds to volatility in prices for imported inputs. Another important influence would be the fluctuations of their farmgate milk prices.
Increased consumer awareness of health, environmental and ethical trends - Positive
Consumers have shown to lean away from dairy milk and more towards alternative milk products such as soy or almond milk. This is because the rate of lactose intolerance in Australia is rising. Consumers who are not lactose intolerant are also choosing to use alternatives such as soy milk due to providing low fats and higher protein intake. Changing lifestyle choices such as a rising veganism trend is a factor. Societal attitudes towards animal welfare and the environment are set to discourage dairy consumption, and supermarkets are going to increasingly stock products targeted at vegetarians, vegans and consumers allergic to gluten or lactose.
Competitive Positioning
Based on competitive positioning, we would like to form a view that NOU has a competitive advantage within the industry.
NOU has exclusive contract and major distribution channels
Having contracts with national-food service chains like Muffin Break, McDonalds and Soul Origin, and distribution channels to supermarkets, including Woolworths. Another channel is Officeworks. This gives a moat and the benefit of network effects. This would increase brand awareness among consumers and other businesses. Barriers of entry will be harder for new entrants, as they need to have the scale to compete with existing competitors with these exclusive distribution channels nor contracts.
Customers are loyal to brand and unlikely to switch
NOU has a strong brand identity and is widely known in the barista industry. Increasing consumer demand for alternative milk due to health trends, café and restaurants owners must adapt to these changes and must have as part of their menu items. Noumi has grown significantly over the past five years, overtaking Vitasoy in 2018-2019 to be the largest player. Noumi has benefited from strong growth in demand from its specialty barista products launched in 2017. In mid-2021 the company entered the oat milk segment with new products in its MILKLAB and Australia’s Own brands. It is sold in around 8,000 cafes and restaurants around the country.
Noumi holds largest market share within industry
In recent years, Noumi has rapidly expanded its market share, focusing on export markets and expanding its product range locally. In 2023, NOU currently has 36.5% market share and has the highest revenue out of competitors. For market share concentration, the four largest non-dairy milk manufacturers in Australia, Noumi, Vitasoy, Sanitarium and Pureharvest account for over 80% of industry revenue in 2022-2023.
Investment Summary
Thesis #1: NOU’s turnaround situation creates 100% short-term return opportunity, with large margin of safety
NOU debt-to-equity is very large, but most of the debt is convertible notes which mature in 2027. This decreases the risk of bankruptcy in the short term, as the maturity of the convertible notes is not due for a few years.
Because of heavily depressed share price making NOU a nano market cap, it provides margin of safety, and an asymmetric return within one year.
NOU is unlikely to go bankrupt in the short term
Looking at the balance sheet, it shows total liabilities around two times the amount of total assets. But, looking closely at one of the accounts which convertible notes, it contributes to majority of the total debt. This is funded debt and 90%+ is not due until 2027. This allows NOU to have flexibility and to survive when it was facing going concern issues and taking heavy debt levels. NOU only needs to make cash interest payments of approximately 8.5% p.a. It has secured a revolving credit facility for liquidity needs, as well.
Turnaround in operating cash flow
From 2019-2022 operating cash flow was negative, until last year its turnaround to a positive figure. This meant that NOU was following its restructuring program throughout the years. Although it still shows a negative net profit, operating cash flow is seen as a better earnings gauge. It shows NOU is probably profitable, turning its profits into cash, and can finance more of its growth internally, without borrowing or selling more stock.
Thesis #2: NOU restructure shown great progress, after change of management
In 2020, Michael Perich has replaced Rory Macleod as CEO due to breaches of continuous dislosure obligations in their financial reports. NOU has focused on a turnaround strategy called “Reset, Transform and Grow”. Despite facing multiple liquidity risks and losing 95%+ of their share price value, NOU managed to stand the adversity throughout these years.
New CEO capital allocation decisions
With a new CEO and new board restructuring, management have implemented positive capital allocation decisions that aligns with their change of strategy. First, would be the termination of dividends, which would increase cash flow and liquidity. Second, they had divested from unprofitable divisions such as the cereals and snacks segment that was sold in 2022, and the seafood business in 2022. Thirdly, they focused on cash flow instead of net income which shows management has long-term view of the company. Lastly, with high debt-to-cash flow, NOU managed to use leverage and maintain its growth in revenues.
CEO insider ownership in NOU
When Michael Perich took over, it has shown that majority shareholder Arrovest Pty Ltd own 52.53% of NOU’s fully paid ordinary shares. Arrovest is a privately-owned family investment company, whose board consists solely of the Perich family. Other than the CEO, another family member is Mr Tony M. Perich AM who is also on the board of directors as Deputy Chair and Non-Executive Director. This is important, as it is now a family-controlled company, its gives the assumption that their interest will be aligned with those of minority shareholders, because a large portion of their own net worth is in the company and likely have a long-term future outlook for NOU. Institutional ownership is very low in comparison around 13%, providing a greater upside potential once they realize the value of NOU.
Strategic shift: “Reset, Transform and Grow”
In 2021, NOU shifted to a turnaround strategy “Reset, Transform and Grow”. In the reset phase, NOU stock relisted for trading, and completed their convertible note recapitlisation. The Perich family has taken over, and the former leadership team has been replaced. From 2021 to 2023, changed to the transform phase being improving sales, earning performance, and reducing costs. From 2023 to 2025, NOU switched to the grow phase where they focus on three pillars being products, channels and geographies. Both operation segments has grown consitently in terms of EBITDA, especially Dairy and Nutritionals operation segment had completed a turnaround from losing operating losses into a positive adjusting operating EBITDA within one year.
Thesis #3: All legacy class isses has been settled
NOU been been facing multiple litigations such as class actions and ASIC proceeedings. With recent updates, these litigations have been settled along with penalties, and the going concern issue for NOU is no longer an issue. There is still one more class action left.
Slater & Gordan and Phi Finney McDonald Shareholder Class Action
Recently on 16th October 2024, Noumi has announced that it has reached an agreement to settle the consoldiated class action commenced against it and its former auditors, Deloitte Touche Tohmatsu (“Deloitte”), by Slater & Gordan and Phi Finney McDonalds, on behalf of shareholders and former shareholders. This was in relation to the for NOU’s accounting fraud back in 2020. In response, NOU’s contribution the settlement will be met by the company’s insurers. As a condition of the settlement, NOU has agrred to pay certain legal and professional costs associated with resolving its legacy matters. These costs, which amount to approximately $4 million to date, will be reported in NOU’s FY25 financial results.
ASIC Class Action
In July 2020, ASIC started its investigations and sued NOU and ex-chief executive Rory Macleod and ex-chief financial officer Campbell Nicholas for alleged disclosure breaches. ASIC class action was combined with another class action by a shareholder. ASIC released a statement that if successful, may lead to about $46 million in fines, but would not be taken against the non-executive directors. NOU nearly collpsed in 2020 after having to restate several years of accounts and booked $590 million in writedowns following nine-month suspension on the ASX. Tony Perich saved NOU in its $265 million recaptisation along with the first tranch of convertible notes. The entire senior leadership team was replaced and the chairman. Fortunately on 5th August 2024, the Federal Court has ordered NOU to pay a penalty of $5 million for the breach disclosure, and NOU will pay a $50 thousand contribution to ASIC’s cost with 28 days of judgement. The court has also ordered that the penalty be paid in instalments of $2 million payable within 28 days of judgement, $1.5 million within 12 months of judgements and a further $1.5 million with 24 months of judgement. This is a positive sign for their turnaround, as it is a small penalty in comparison of the alleged $A48 million penalty and NOU revenues, and dramatically decreases liquidity risk as it is paid in installments.
Blue Diamond Litigation
NOU had a settlement of $A48 million by a key supplier, California-based Blue Diamond Almond Growers, which will allow it to keep selling its growth brand Milklab. To pay for this NOU issued a second tranche of convertible notes at $1 per note up to $26.7 million. NOU is supported by the provision of a $US18 million bank guarantee, which forced NOU to sell of all of its shares in subsidiary, Australia Fresh Milk Holdings, so it could use the proceeds as a security for the additional guarantee facility. This was settled in November 2021, starting with a split payment of $US17 million; and 16 quarterly payments totalling $US18 million over four years from August 15. Blue Diamond was seeking damages for a breach of the licence agreement, and compensatory and general damages for breach of an alleged oral agreement. NOU still has the liquidity and funding to pay for these quartely payments.
Valuation
We conducted an intrinsic valuation to arrive at a 12-month target price of $2.40 per share, a 1614.29% upside from NOU’s closing price of $0.14 on August 16, 2024. My methodology is using a DCF model.
DCF with a 1-year projection period
We valued NOU using a 1-year DCF model. NOU’s disclosure is limited, so forecasting volumes is unreliable as there compelxities and nuances in the business, which is dependent on industry prices. Instead, we have forecasted group revenue by precentage growth to reflect the underlying assumptions of the business.
Revenue Growth
As NOU represents 75% of the domestic markets, growth has historically been strongly correlated to the repeated sales of their products, expansion into international markets, and introduction of new products. We forecast that NOU would grow by 9.5% semi-annually, due to their strong brand, which they can grow and be more recognized on a international level.
Management’s strategy shift
As outlined in Thesis #1, on p. 5, NOU has undergone a recent strategy shift. Management has completed their reset and transform phase. This is demonstrated by their reduction in costs such as CAPEX, and turnaround in key financial measures such as operational and free cash flow. Throughout the years, revenues has grown dramatically driven by volume growth domestically and internationally, while managing to achieve a hidden net profit. We have conviction in NOU’s growth prospects and margin expansion.
Financial Analysis
Improvement in “Big Five” financial measures
For financial analysis, we have used the “Big Five” measures that Wall Street and other investors look for when they assess a company’s financial performance or its attractiveness as an investment. Revenue growth year-on-year has been stable during the recent years, around 5 percent. EPS 10 year trends has been not consistent, as it is a commodity business due to fluctuations to commodity prices within the dairy industry. EBITDA has been growing, and is shown as a sign of future operating cash flow. Free cash flow, has turned around to positive since new CEO and restructuring of management which was taken place in 2020. Return on capital has turned positive and has been greater compared to old management/CEO. EPS is still negative due to negative net income.
Passes Piortriski’s F-Score Test
We have also supported our financial analysis with Piotroski F-Score which is used to assess the strength of a company’s financial position. This has been used as NOU is a nano-cap value stock. NOU has received a score of 7, therefore it passes the test, giving the result of a great value opportunity. Academic studies have shown results using this F-Score analysis on small-cap companies which have beaten the market average by more than 10%.
Investment risks
Risk #1: Commodity pricing risk
NOU has exposure to commodity price risk relating to the input costs for raw materials, packaging and utitilities and the sale of products such as bulk cream and surplus protein. For their dairy and nutrititionals segment, the group has risk regarding the Australian farmgate milk prices and its dislocation from the global dairy commodity price which is reducing its competitiveness in the export channel. These prices affects the expenses on the income statement which is an increase in asset impairment charges.
Mitigant: NOU would manage this risk through longer-term agreements, including the procurement of milk and has worked with customers to build and maintain relationships to manage the effect of volatile farm gate milk prices. They will continue to monitor these prices.
ESG
NOU has placed an importance on ESG, with the strategy called the Healthier Tomorrow plan. Based on our internal analysis the most important and industry relevant ESG factors, NOU has made progress towards this goal.
Environmental
NOU engages with farmers and the the Victorian Department of Energy, Environmental and Climate Action to develop Greenhouse Gas footprints and actions plans for GHG emissions reductions.
Waste and packaging: 100% of Noumi packaging is Australian Packaging Covenant Organisation by 31 December 2025. 50% of packaging are from sustainable sources and/or recycled content by 2025, and are currently diverting 85% of their waste from landfill.
Energy and Climate: 90% of their dairy farmers partnering on carbon reduction initiatives by 2030. NOU has completed the emissions footprint pilot program with the Victorian pilot program. They have a emissions reduction target of 50% and 100% renewable electricity by 2030. Currently the solar installation at Shepparton can supply 25% of the site’s power requirements.
Sustainable Agriculture: NOU’s farmers are implementing the Australian Dairy Sustainability Framework in specific areas of their operations. This is in compliance to the Australian Agricultural Sustainability Framework. 100% of farmers are compliant with NOU’s Food Safety progam which also ensure the best care, health, and wellbeing for their herds’ whole lifecycle.
Sustainable Water Use: 25% reduction in Noumi’s water consumption per tonne of production within operations by 2030. 50% of discharge water from operations recycled by 2040. 90% of farmers and growers implementing water efficiency measures on-site by 2030. NOU work with our farmers on water efficiency measures, utilising systems such as the installation of pipes and risers in lieu of open channels, installation of pressurised precision irrigation systems, and improving tonnes of feed grown per megalitre of water applied.
Social
NOU has continued to focus on their workforce and strives to embed our values of Integrity, Respect, Creativity, Excellence, Collaboration, and Accountability.
Employee Development & Wellbeing: NOU is committed to meaningful engagement to help achieve job satisfaction, empowerment and holistic wellbeing. To build expertise and skill, they conducted tailored face-to-face and online Leaders Engagement Training for Noumi leaders across Australia and South East Asia. Continued to provide career development opportunities across the business resulting in a 30% internal movement and promotion rate. They use 16 initiatives and events implemented during the year to support the physical, mental, and emotional health of our people. NOU will implement career development plans for senior leaders and employees in critical roles by the end of 2024 calendar year. And a new leadership program is currently under development for their senior leaders to be implemented in 2025.
Diversity & Inclusion: NOU remains committed to striving for a balanced representation in managerial and leadership positions. They recognised the diverse cultural heritage and traditions of our people through the celebration of activities such as Australia Day, NAIDOC, and Chinese New Year.
Consumer Health & Nutrition: ≥75% of Noumi-branded products carry a nutrition and/or health claim by 2025. They want to achieve a minimum 4-HSR on ≥75% of eligible, Noumi-branded products by 2025. Both targets has been met. Lastly, they want to fortify all Noumi-branded plant-based dairy alternative products to match the calcium content of cow’s milk by 2025.
Community Engagement & Impact: During FY24 Noumi donated more than 100,000 litres of Noumi products to charity partners for local food security relief. In FY25 Noumi will partner with Shepparton Foodshare, Goulburn Valley Football Umpire Association, and the Greater Shepparton Business Network.
Governance
NOU has strong corporate governance practices and policies that align management interests with its stakeholders.
Shareholder ownership: NOU is currently majority owned by a privately-owned family investment company which is Arrovest Pty Ltd. The board consists solely of the Perich family, which two of those members are on NOU’s board of directors. They are the only shareholder that owns more than 10%, owning 52.53% of the shares outstanding.
Executive Compensation: Executives are compensated through a base salary, a STIP, and a LTIP, with around 50% in variable compensation. STIP and LTIP are based on NOU’s financial metrics which is cash conversion, EBITDA, and leverage ratio. And on Non-Financial metrics including safety, culture & leadership and some specific KPIs. All metrics strongly aligns management with NOU’s strategy. We have strong conviction in management’s ability to execute on their strategy shift due to their alignment through STIP and LTIP, and well as their ability to generate above returns.
Management: NOU’s newly appointed CEO in recent years, Michael Perich, have been with NOU since the restructure. The management team is comprised of highly experienced individuals, with decades of prior executive experience, and deep knowledge, ensuring NOU is well-positioned to execute on growing the business ahead. With the expertise, this has led to the success of their restructuring and turnaround within their operations. They have fixed two legacy issues that was caused by prior management, and ensured NOU continue business on a going-concern basis.
Board of directors: The tenure of the Board, is an average of 4.95 years excluding the new member, with a outlier board member being 15 years. There is a 40% female representation on NOU’s Board. The diversity of industry experience across the Board members and years of experience in management positions and other board positions positively reflects on the abilities of NOU’s Board.