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The Freedom Foods issue is an interesting one. I’m sure many...

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    The Freedom Foods issue is an interesting one. I’m sure many investors in KTD are making comparisons here and seeing FNP go into suspension for a long period may be a reason they are (panic) selling.

    It is worth pointing out that:
    1. FNP’s primary issue was to do with obsolete stock (expired food) that has to be written off, as I understand to the tune of $60m+ but investigations are ongoing.

    2. My understanding is that the majority (if not all) of this obsolescence has occurred in their “cereals and snacks” business - the only business unit that experienced a decline in sales (dropped ~15%) per the last annual report. This decline was a red flag for what was coming.

    3. FNP made a “strategic decision” to move away from contract manufacturing to free up production capacity to focus on their own brands. It appears this may have been a questionable decision which may have contributed to some of these issues?

    4. The FNP dairy and nutritional business unit grew strongly in the last annual report (+80%). This business unit contributes some 52% of FNP’s revenue.

    In comparison, Keytone:

    1. Has made it clear in the last quarterly that it manages any similar risk of stock obsolescence and write downs by simply not holding much finished stock: “Keytone continues to pursue its strategy of making to order rather than making to stock to mitigate the potential buildup of excessive inventory balances and the necessity to write down stock levels as has been occurred in the industry“

    2. Doesn’t have a large proprietary brand portfolio like FNP where it makes to stock. It focuses predominantly on producing for others shifting the risk of stock obsolescence to its customers. This is retail/wholesale 101 and I like the direction Management are taking here.

    3 Mainly operates in the dairy and nutritional space. This is the majority revenue generating business unit for FNP and the fastest growing so its good to see us with a focus on this space imo. I posted a comparison of Tonik vs Crankt (FNP’s protein snack brand) the other day. This is one of the fastest growing areas for FNP and KTD is just starting to explore this space with Tonik.

    Overall, I think the FNP situation is weighing somewhat on KTD and its worth spending some time to understand the key differences.

    It was 29 May when FNP first revealed the inventory issue to the market. This was about the point where KTD started its decline from around 30c to where we are today.

    One of the things a value investor will do is look for opportunities where macro conditions (such as a natural disaster, unconnected issue in the industry, wider market sell off etc) had an disproportionate negative impact on the SP of an unimpacted Company.

    When outside factors, such as a different risk management approach to inventory by another Company adversely impact the share price of another Company, this could be one of the best times to buy an undervalued stock. This is only one of the reasons I have been buying at these levels in the past weeks.

    It’s good to see KTD highlighting its approach to inventory in the latest quarterly to try and reassure the markets. I think once FNP is back on the boards and people realise a one off write down in a single (declining) business unit which is part of an overall fast growing, profitable me business isn’t the end of FNP, then we might see risk appetite come back and demand come in fast for something like KTD.

    In the meantime as I said imo a good time to perhaps buy the value at these levels.

    As always, the above is my opinion only and you should do all of your own research before making any investment.

    I open up the floor for thoughts?

    Cheers,
    TT
 
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