• Angus Crennan

Patties Food Ltd Case Study

Patties Foods Ltd (PFL AU) is a listed Australian company Balmoral Pty Ltd purchased shares in at an average price around $1.14 during July 2015. We remain long the stock as at November 2015.

The company’s website is here http://pattiesfoods.com.au/investors

At the time of purchase the company’s share price was under pressure due to concerns about contaminated imported frozen berries. The company had done the right thing and pulled all frozen stock potentially effected while withholding its interim dividend to shareholders. The company also was upfront with its disclosure and initiated (and maintains) a rigorous testing program. In short a terrible situation handled well. Ultimately testing confirmed there was no contamination.

Despite that temporary setback weighing on investor sentiment the core Patties franchise was in good shape. Patties is a household name baked goods company which dominates its target grocery segments. The same family has controlled the company since the 1960s without dilutive equity issuance, built a state of the art bakery and delivered (baked?) consistently good profit margins. The Patties’ business model, products and management are each proven.

At $1.14 the company was valued at around twice the value of its AUD 190m of tangible assets, 9 times 2014 net profit and using its 2014 dividends of 7.1cps offering a franked yield over 8% (although note the interim 2015 dividend had been withheld, so the 2015 dividend yield was unlikely to match 2014.. never-the-less the dividend potential of the company looking forward remained).

At the time of writing on 21 October 2015 the company was trading around $1.18 having recently paid 5c of fully franked dividends.

A reasonable multiple for this company would be 13x (which values the shares closer to $1.40 on 2014 earnings) and if the initiatives the company is undertaking start to deliver accelerating earnings growth then the shares could be valued at a higher multiple still.

Looking forward:

Provided no complex corporate activates are undertaken in 2016 earnings could roughly be expected in the vicinity of 10-13c per share.

Assuming the dividend payout ratios of 45% – 59% (2015 and 2014 respectively) is maintained investors can anticipate fully franked dividends of 4.5c to 7.6c per share next year. At $1.14 entry price Balmoral paid, and including franking, that equates to a 5.6% to 9.5% after tax yield.

All up Balmoral has a proven business in a stable industry paying an attractive yield purchased at a wonderful price. Assuming 6c of 2016 dividend (mid-point of range above, equal to 8.6c per share after tax), together with an assumption the share price traded up to $1.40 over the year (a further 26c of unrealised capital gains) then the position could contribute total returns around 34.5c. Against and entry price of $1.14 that would represent a total return (including franking) over 30%.

That is the theory however we know we own a good company and we can be patient if the market does not move as expected. Even if the company re-rates the share price up to our target price, depending on if there are more attractive positions available we might not exit.

That is the luxury of patient capital owing good companies.

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