MFB - My Food Bag

[Auto Rower]

SP shoudlnt be used as a measure of value. From the article - which is pretty telling: "The survey found HelloFresh was the most commonly-used food service app, used by 33 per cent of Kiwis in the past 12 months (from 31 per cent previously). Uber Eats was the next most prominent at 31 per cent (unchanged) with My Food Bag coming in third at 20 per cent (from 17 per cent). The survey also found usage was up across several emerging food service brands with Menulog (10 per cent from seven per cent last year), Deliver Easy (eight per cent from six per cent previously) and foodpanda (four per cent from one per cent) the biggest gainers."

 Although they are all suppliers of food, hello fresh & m f b are playing in a different league both aiming for the health conscious professional middle classes that are time poor .
The others are more food delivery
And the big difference is Nadia I have not looked into how profitable h f is but they sure do a hell of a lot of advertising to breech the Nadia moat

[Ferg]

Interesting discussion and I hadn't considered differing segments within that market.

Is this a dividend yield trap?

It would take tremendous dividends to offset capital/SP losses in light of some of the headwinds being faced by MFB.  In particular MFB delivered cost savings to meet the IPO projections and it's questionable whether or not they are sustainable in light of rising food, freight and staff costs.  MFB prices would need to increase or portion sizes/service levels reduce to restore profitability which might test the "stickiness" of their segment of the market.  Interesting stuff and I am curious to see how this plays out.

I'm not a holder but I have a morbid curiosity.  There might be an unrealistic price at which I am interested ..... but not yet.

[Minimoke]

Interesting discussion and I hadn't considered differing segments within that market.

Is this a dividend yield trap?

It would take tremendous dividends to offset capital/SP losses in light of some of the headwinds being faced by MFB.  In particular MFB delivered cost savings to meet the IPO projections and it's questionable whether or not they are sustainable in light of rising food, freight and staff costs.  MFB prices would need to increase or portion sizes/service levels reduce to restore profitability which might test the "stickiness" of their segment of the market.  Interesting stuff and I am curious to see how this plays out.

I'm not a holder but I have a morbid curiosity.  There might be an unrealistic price at which I am interested ..... but not yet.

There was a bloke who made the mistake of expressing a view that essentially having an attractive person fronting an IPO was a distraction from the fundamentals. I agree with him 100%. Be wary of the attractive looking dividend.

When the IPO came out I recall I bought out my bargepole.

[Ferg]

There was a bloke who made the mistake of expressing a view that essentially having an attractive person fronting an IPO was a distraction from the fundamentals. I agree with him 100%. Be wary of the attractive looking dividend.

When the IPO came out I recall I bought out my bargepole.

Agreed, agreed, agreed and agreed.  Absolutely no dispute from me with any of that.

I put up an analysis on another site warning to not touch it using other people's barge poles!  At the time I did not believe they would deliver on their cost savings but to their credit they did.  Although I note they have now aggregated some data to not provide the same level of detail that was disclosed during the IPO.  Typical CFO behaviour when something doesn't quite go to plan....you shift the measurement basis. As am I where I now think the cost savings achieved are not sustainable.  Maybe I am being chicken little but I still stand by my original work and my current position.

[Auto Rower]

Absolutely on all those points Including the barge pole for a long time  ,but even though the sp has been hammered the profit is still there in this service .
 Plus the competitors will face all of the same difficulties outlined earlier inflation staffing etc maybe  mfb have suppliers tied in time will tell .
   

[Fiordland Moose]

Interesting discussion and I hadn't considered differing segments within that market.

Is this a dividend yield trap?

It would take tremendous dividends to offset capital/SP losses in light of some of the headwinds being faced by MFB.  In particular MFB delivered cost savings to meet the IPO projections and it's questionable whether or not they are sustainable in light of rising food, freight and staff costs.  MFB prices would need to increase or portion sizes/service levels reduce to restore profitability which might test the "stickiness" of their segment of the market.  Interesting stuff and I am curious to see how this plays out.

I'm not a holder but I have a morbid curiosity.  There might be an unrealistic price at which I am interested ..... but not yet.

My morbid curiousity '2 hour back of the envelope' modeling exercise wound up becoming something quite a bit larger. Ferg thank you for your research, I'll flick you my model tomorrow.

Agree it is absolutely a dividend yield trap. Financially I think it has performed admirably. Yes deliveries stepped up during covid but people don't appreciate the majority of the increase in earnings actually came from mostly from procurement efficiencies.  A wee bit of assembly and distribution efficiencies but the 2H FY22, particularly Q4, was hit hard by poor productivity, labour shortages, sickness, extra H&S kit, which set it back.  I think MFB did 'grow up' into an adult over the last few years - the procurement savings were all forecast ~1.5 years in advance and met, achieved after large external reviews, new ERP system put in place, replaced the existing operations manager, consultants hired, etc etc. Some of those gains will be permanent, but much of them could be competed away over time.  Plus, we will never know the nature of all these new contracts put in place - how long were they for, how many were absolute fixed price, what happens when the roll off, etc.  I think you'd be mad to assume as the brokers do that ingredient margins remain constant forever.

2H FY22 was actually phenomenal and driven (in part) by the new kitchen initiative. My BOE was it drove the majority of the step up in average order value and at better unit GP% economics.  It's a fantastic initiative, and will be an increasingly important incremental earner for the business, one that is not really well understood by the market (or even the analysts), but questionable how much value will ever be subcribed to it for a period of time, as ultimately linked to deliveries.

none the less the better 2H brings the cynic out of me. The company was desperate to meet prospectus forecast. They would have held back every single piece of spending they could have. They implemented a new STI/LTI/share scheme post balance date. They claim they stopped marketing in Q4 which saw a dip in acquired customers because they couldn't cope with covid outbreak in the march quarter. that might be true. but I reckon they also stopped marketing for new customers because it is actually loss making in the very short term. New customer acquisition is loss making for a period of time (3-8 months depending on how you allocated various marketing costs), but also critical to underpinning following periods.

I think the meal kit industry in aggregate revenue dollars earnt will grow meaningfully over the next 10 years, but hello fresh is clearly the momentum player. Bigger in terms of customers and revenue, smaller in terms of NPAT, its marketing spend is massive, but declining yoy as a % of sales. Meanwhile MFB's marketing spend is rising. at some point the two will converge and some sort of equilibrium eventuates.  Efficiencies will be competed away, and margins % margins decline.  There are still 2 other decent sized competitors lagging behind MFB and Hellofresh, will be interesting to see what becomes of them.

People might say based on LTM metrics or consensus estimates the business is cheap. It looks cheap on forecast consensus because the market does not believe the consensus. 3 brokers provide forecasts (only 2 into marketscreener), all 3 were either joint lead managers or manager, and they call them sell side analysts for a reason.

I think the market reasonably expects the business to go backwards for a few years. But with the downslope in SP while the business was performing well it will be interesting to see how the price reacts when/if the business actually starts releasing results going backwards.  The market obviously expects it, but could see some volatility when expectations become reality.

I think its a better business than most people expect, and probably perform a bit better than we expect it to. Sadly, I don't think it will ever be rewarded for that on its share price.  You cannot overstate how good MFB's cashflows are. This business could easily pay 100% NPAT in dividends. Low capex, negative working capital, good margins. There is zero reason other than policy and management conservatism why this business couldnt pay out 100% NPAT in dividends per year over the long term. But thats also part of the problem. Little barriers to entry. Here comes hellofresh and in 5 years bigger than MFB.  But at least at the top revenue line its a growing industry for sure.

My model has 5 scenarios - my most bullish case, is well below the consensus for the next 5 years.  My 'status quo' base case contains some pretty pessimistic assumptions. Increases in marketing, discounting, fixed costs, declines in margins, deliveries, etc. It spits a SP in the 70c range, declines and rebounds like a u shape and I think that's how the market perceives it, they are plausible and if one were doing a spreadsheet it would be the first assumption you'd pop in, so the market clearly operating as it should and MFB's SP deserves to be well down. I assume an 11% discount rate as well.  But I think in practice the business has quite a few levers it can pull and could walk over very low hurdle expectations from time to time, but the market won't value that for the time being.

For a few extra % return, on a business with such a wide range of plausible outcomes, the question is it worth it, or is better to stick that dosh into something like heartland which might give you a few % less yield but in 10 years time you know will have also appreciated well in capital value, whereas who knows with MFB.  If I won the lottery and had to put it in either MFB, heartland, some gentailer, etc, it wouldn't be MFB, regardless of the yield for this year

My disclosure: I had some capital to invest during this downturn. I set a very small % of it to MFB, because I like to be diversified, and want some yield. I wound up purchasing a third of my initial target allocation  at 77c, due to a lack of conviction.  If it surprises on the upside relative to my forecasts the next few years will lose no sleep, and if it eventuates, think I'll be able DCA into another few parcels at anti embarrassment pricing. and if my downside scenarios pan out, well, i went into it eyes open, but thankful a fraction of my portfolio.

[Ferg]

Nice commentary FM and thanks very much for sharing.  Interesting comments around the halves and quarters.  I think you are right in that spending will have been culled (in particular marketing/advertising) to meet prospectus profitability.  Sometimes you can get away with that in the short term particularly with inefficient spend, but you don't want to self inflict any long term damage.  I did mention elsewhere the systems and processed needed to deliver what they do must be impressive, especially when you look at KPIs such as inventory turnover.  I have no doubt they are doing some fantastic things from an operational perspective but I don't see a moat or competitive advantage......yet.  Good luck to holders.

[Fiordland Moose]

Nice commentary FM and thanks very much for sharing.  Interesting comments around the halves and quarters.  I think you are right in that spending will have been culled (in particular marketing/advertising) to meet prospectus profitability.  Sometimes you can get away with that in the short term particularly with inefficient spend, but you don't want to self inflict any long term damage.  I did mention elsewhere the systems and processed needed to deliver what they do must be impressive, especially when you look at KPIs such as inventory turnover.  I have no doubt they are doing some fantastic things from an operational perspective but I don't see a moat or competitive advantage......yet.  Good luck to holders.

From a purely financial perspective there is no moat to this industry. But perhaps from a psychological perspective the establishment of both MFB and Hellofresh presents one. They are both extremelely slick and play to their differentiated niches.  One has first mover advantage, strong brand attachment and spends incrementally less on new customers than others, and the other is the brash world wide with a mandate to grow even if highly inefficiently monster.  Both of world class apps, strong and improving buying power, logistics expertise, and now that at scale the ability to upgrade or downgrade meal options, change recipies, tack on extras. Those little bits at the end, are relatively easy for someone to do at scale and add good GP gains, but for someone that is new, is extremely hard and results in stock write offs.

I doubt Jane and Joe fantastic cook will start up a MFB V2, too hard, industry is a been there done that, the monsters are growing etc.  Marley Spoon or Blue Apron? Doubt it, they have enough troubles as it is. Woop is local and private, stable search frequencies on similarweb and google trends so losing share but probably running steady.  You have Farro Fresh, who Waterman Capital recently invested into (after exiting most of their stake in MFB), and they do a little bit of premium delivery kit stuff in auckland only, so that is something to watch. Some competition there and unpleasant behaviour from waterman for that blantant conflict of interest (on board of both companies at some time for a while).  Then you have supermarkets but their operation is so finely tuned and efficient they are loath to mess with it in a big way. and MFB's revenue is about what 2 average supermarkets worth?

So I really think it comes down to a bit of a knife fight between MFB and Hellofresh over the long term, where at some point they reach stable competition, which could be~5yrs or more away!.  New Zealand is prized amongst international corporates and private equity for the good margins achieved here, because of a lack of competition.  There is only room for so many because of our lack of scale, and that in the long run results in higher prices and margins.  That doesn't mean margins won't decline - indeed I expect they will for many years. But I also think they will be structurally higher than in other countries as a result.

MFB has its first mover advantage, slicker and more efficient marketing per incremental new customer, brand, local and youthful image of local ambassadors but that will weaken over time.  But its still worth something today, and is evident in todays financial result. Hard to forecast into the future, so in these situations you do as one ought to do, and be unduly pessimistic.

A bit cynical but those are my barriers.

[Shareguy]

What a great post FM.  Our family and many of our friends have been utilising food deliveries off and on for some time. We have found overall that MFB is superior in quality and taste.  Have been buying their ready-made meals for an elderly family member and also ourselves. Healthy and nutritious and dam good to eat as well when stuck for time.

With the money we are paying MFB and really enjoying the meals I decided to have another look at the company from an investment point of view.

We have found Woop to be ok but the most expensive when comparing the main 3 (MFB and Hello fresh).

Here's an insert from NBR which I found interesting.

(Global meal kit giant HelloFresh has beaten My Food Bag on a revenue basis in New Zealand but spending up large on advertising dented its profitability.

According to financials filed with the Companies Office for its financial year ended December 31, the Berlin-based business recorded revenue from contracts with customers of $219.2 million, up 12% on My Food Bag's revenue of $194m for the 12 months to March 31.

My Food Bag's 2022 revenue was very similar to HelloFresh's previous (2020) year-end revenue of $193.8m.

Despite higher income, HelloFresh has significantly higher operating expenses than its NZX-listed competitor, with cost of sales of $199.9m, compared with $146.1m (including marketing expenses) for My Food Bag.

Marketing expenses are a noticeable difference, with the German company spending $16.2m in this area, compared with $4.8m for My Food Bag.

Ultimately, HelloFresh recorded a profit of $13.6m, down 38% on My Food Bag's result of $20m.

Across all of its markets – North America, Europe, Australia and New Zealand – HelloFresh recorded revenue of €5.99b ($988.2b) and a profit of €256b ($422.2b).)


The glaring difference between MFB and Hello fresh is the huge difference in marketing costs.  Both companies are profitable. Both companies have cost pressures. My understanding from the wife is that MFB has increased prices while Hello fresh has not.

MFB could drop it's marketing spend to save some money. It has offshore growth potential and I think an acquisition from what they have said is on the cards sooner than later.

I also had a good look at Who would be interested in acquiring the company. Apart from an obvious competitor which I thought was unlikely, the only area I thought might be of interest was one of the main players in the retail food industry. Westfarmers,Pak and save, Reasturant brands our even Farro.  Chris Marshal standing down as a director also interesting. Why given the holding?

All in all I decided that it's worth a punt and have a small holding. Plenty of downside risk but think it's mostly priced in. Makes we feel better when we tuck into their meals Knowing we own a small piece of it.....

[KW]

There are other quieter competitors in the market.  I use Primal Kitchen, which does no advertising, and provides ready made meals at a cheaper price than MFB.  6 meals delivered from PK is $87.50 compared to $106 for MFB - so that marketing budget makes quite a big difference to the product cost!. 

They get their customers via word of mouth (I have put several people on to them myself) and through the gym networks (where they deliver free) as they offer paleo and keto meals (basically old school meat and 2 veges).  Check them out, I've never had a bad meal from them :-)

I am quite surprised at the high percentage of people using delivery food services, gee we really have become a lazy bunch havent we?  But that being said, it looks to be a permanent lifestyle shift rather than a fad, so the providers will be around for as long as they (a) remain profitable, or (b) can obtain shareholder funding to remain unprofitable, although this business model relies on the greater fool theory which might be disappearing as fast as the cheap money is.

The fall in share price is not so much attributable to the quality of the company, but more that insane market pricing is finally being brought back to earth.  MMM on the ASX dropped from $3.80 to 20c, and Hello Fresh from $97 to $24 so one could say MFB has outperformed its competition. 

Interesting discussion, and one worth reading due to the quality of the posts.  Nice to come into a thread and see an intellectual analysis, rather than 10 pages of people slagging each other off.  Keep up the good work   

[lorraina]

I was once given the advice as to where to buy my lunch while travelling; look where the workers go as they like the best [value]food.
Mention has been made about MFB's lack of moat and the ease of setting up in competition to them.
Yet the same could have been said about Ebos and Mainfreight.
Their moat is now their reputation,built of being customer driven offering exceptional service.
MFB's success will depend on the quality of their meals, and excellent dependable service,not price alone..

[Minimoke]

SP shoudlnt be used as a measure of value. From the article - which is pretty telling: "The survey found HelloFresh was the most commonly-used food service app, used by 33 per cent of Kiwis in the past 12 months (from 31 per cent previously). Uber Eats was the next most prominent at 31 per cent (unchanged) with My Food Bag coming in third at 20 per cent (from 17 per cent). The survey also found usage was up across several emerging food service brands with Menulog (10 per cent from seven per cent last year), Deliver Easy (eight per cent from six per cent previously) and foodpanda (four per cent from one per cent) the biggest gainers."

So what do we know
- food inflation is rampant. Making ingredient costs more expensive and risk shrinking margins.
- there is no moat. As expected other companies have come into this space. And more will continue to do so. Probably fluctuating over time. Marketing spend will need to increase to maintain market share
- Who packs My Food bags? There is a labour shortage and labour costs are going up as a consequence.
- inflation is rising. House values are decreasing. Dial in food is discretionary spend. When purse strings need to be tightened  service like this may be the first to go.

Would I touch MFB. No - too many risks for me.

Oh dear. As expected

"My Food Bag has seen a slower start to trading in FY23 than expected."

"As at the end of July 2022, deliveries were down -3.8% compared to the same time last year."

"Omicron had a marked effect on My Food Bag's supply-side confidence in Q4 FY22 as the company and its suppliers encountered difficulties accessing staff and dealing with the flow-on problems of incomplete and late deliveries."

"Trading to date in FY23 has also been affected by the economic environment and inflationary pressure on households. This has resulted in a relatively stronger Bargain Box performance within our portfolio of brands and an overall pattern of customers trading down to smaller bags. These have had an unfavourable impact on mix, which negatively impacts earnings."

[Basil]

Trading on its all time low and as mentioned before the consistency of the downtrend since listing is quite remarkable.  http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/MFB/396940/376499.pdf
You'd have to be a very "brave" puppy to bet against that downtrend continuing after that trading update and "tuck in" now or anytime soon.
Buying in confirmed downtrends is the sort of punting I am happy to leave to others.
Sustainability of the dividend looks very much in doubt to me.

[CharlieMunger]

MFB investors after today's announcement

[Shareguy]

Sales up which is good, but product mix taking the blame for what is a downgrade.  It seems customers are opting for the cheaper meals. Only had a small holding as part of my punting portfolio but after looking at the pros and cons sold out on opening. The first downgrade but most likely not the last.

Good luck to holders.