August 20, 2015 - 2:57pm EST by
2015 2016
Price: 0.56 EPS 0.03 .05
Shares Out. (in M): 74 P/E 13x 8.5x
Market Cap (in $M): 65 P/FCF 13x 8.5x
Net Debt (in $M): -15 EBIT 0 0
TEV ($): 49 TEV/EBIT 9x 6.1x

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Real Good Food (RGD) is a manufacturer and seller of cake decorations, food ingredients and it has a whoiesale bakery. The company used to have a large wholesale sugar import/distribution business, but it just sold this money-losing business in May, which has created the long opportunity (in addition to the recent acquisition of Rainbow Dust)

First, a brief summary of the current businesses:

Real Good Food has one excellent business of high value, and a handful of similar businesses of moderate to little value.

Renshaw - this is the important business, and did £6.1m of EBITDA last year at a 13% margin (about 3/4 of total company EBITDA last year) and it is the only truly stable and defensible business. Renshaw manufacturers cake decorations and icings. It sells icings and marzipan under its own brand throughout the UK and continental europe, as well as supplies key customers, such as Wilton Brands in the United States. It has a leading brand and market position, and the business enjoys stable low-teens margins with consistent mid-to-high single digit revenue growth. 

Rainbow Dust - a recent acquisition that will probably add around £2M of EBITDA in FY2016. RGD purchased this in January 2015, and last year it did £1.7M of operating profit. 

Garrett Food Ingredients - a dairy and bakery ingredients supplier to wholesale market in UK; inputs are dairy and sugar; its proven to be a volatile business with volatile profits; I ascribe virtually no value to this business for the purposes of this article

R&W Scott - Manufacturers jams and pie fillings; does just under £10M of revenue and struggles to generate profit due to lack of scale. The brand is decent but the business is too small - i ascribe virtually no value to this either.

Haydens Bakery - Wholesale baked goods supplier, manufacturers cakes, tarts etc. While it consistently does £25-30M of revenue, EBITDA seems to hover at £1M or so. I assign about £5M of value to this business.

Real Good Food Europe - A fairly new subsidiary created to increase market share of Renshaw + Rainbow Dust in continental Europe. its new and runs at break-even, but is a potential growth channel for the company.


Brief history:

Back in 2005/2006 time frame, the company bought Napier Brown, a large wholesale sugar distributor with revenue in excess of £125M. This business was more than 50% of the total revenue before it was sold (but it lost money), so its sale a few months ago has a material impact on the financial statements.

The strategy for this acquisition was to use an advantaged sugar supply to help aid growth in Renshaw and its other food ingredient businesses, while trying to maintain or grow share otherwise in the wholesale sugar business in the UK. Not only did this business prove to be very volatile, with profits fluctuating wildly with commodity prices (sugar), but the dominant player in the UK, British Sugar, recently decided to try to take share from RGD/Napier Brown, and the business was a significant money loser in the past couple years. 

Luckily, a Brazilian sugar company offered to take this off RGD's hands at a great price, £44M, leaving the company with net cash of around £10M today (this net cash position has not yet been reported, because their fiscal year ended March 31 and the sale closed on May 20th 2015)

Investment Thesis:

With the sale of Napier Brown, we are now left with a pretty clean company with a net cash balance sheet and a great business in Renshaw & Rainbow Dust. Total segment EBITDA for FY2016 (year end March 31, 2016) should easily exceed £10M (it was £8M last year without the full contribution from Rainbow Dust). Overhead should be around £2.5M, so total reported EBITDA should fall comfortably in the range of £7-8M. The enterprise value today £31M and the business has little capital intensity.

The current CEO basically created this business over 10 years ago, and he's 64 now. The company has a major shareholder from the founding family of the Napier Brown sugar business that was acquired for cash & stock in 2005, and the main family member here is in his 70s now and has not had any liquidity from this significant investment in over a decade. 

I think the game plan here is to integrate Rainbow Dust & Renshaw and get some decent growth and share gains with the help of Real Good Food Europe, and then sell this thing in 2-3 years' time. There have been about 60 comparable ingredient / baking / confectionery sector over the past 10 years at an average EV / EBITDA multiple of about 11x, and I think this could sell for more than the average given the excellent characteristics of the Renshaw brand. 

None of this analysis gives credit for profitable use of its net cash balance, which the company plans to use to make "accretive acquisitions" and again, I ascribe little to no value to the bulk of the other businesses.












I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


In the near term, I think the stock will trade well over the next 12 months as both the pro forma balance sheet is published for the Sept 30, 2015 period, as well as pro forma financials that include the high profitability from the Rainbow Dust acquisition. These two factors combined I think will drive the stock to a level in the 75-100p range, based on a 9-10x EBITDA multiple on the pro forma total company EBITDA.
Over the next three years, I think the Renshaw / Rainbow Dust combo will be doing segment EBITDA in the £9-12M range, and this business can be sold together for a healthy multiple, likely at or above 12x. But assuming just a 10x multiple on £10M of segment EBITDA, that gets you to a stock price of about £1.50.


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