Update: My Food Bag (MFB.NZX, MFB.ASX)

Interim Accounts to 30th September, 2022 (Three Years)

Photo by Brooke Lark on Unsplash

All amounts are in NZ$ unless otherwise stated.

Data

The data set for this article can be found in PDF format here:

Mfb HY23

80.3KB ∙ PDF file

Download

Download

Coverage

The company was previously covered in the Interims 30.9.21, an Alert 10.3.22, an Alert 10.4.22, the Annuals 31.3.22, an Alert 15.8.22, an Alert 9.9.22, and an Alert 18.11.22.

Date

29th November, 2022

Current Price

NZX: NZ$ 0.415

ASX: AU$ 0.45 (trades infrequently)

Trading History

NZX:

Two Years

Source: Direct Broking

ASX:

Two Years

Source: Direct Broking

Key Points

• Negative cash flow from operations of $5.5m using our method

• Dividend of 3.0 cents is the same as the prior comparable period (pcp)

• Total earnings down 37.7% to $5.9m

• Little cash ($0.134m) but some unexercised facilities available

• Intangibles higher than equity by over $22.0m

• Current share price of 41.5 cents is an all-time low

• Basic & diluted net tangible assets per share of -9.1 cents

• Underlying profit of $6.9m is higher than the company’s reported net profit from continuing operations of $5.9m

• Post balance date change in CEO (position now filled by CFO who was also the interim-CEO)

Overview

My Food Bag (MFB) is a New Zealand-based meal kit producing and delivery company which is listed on both the NZX and the ASX.

It was subject to an initial public offering (IPO) last calender year and has since fallen steadily in price. Its IPO price of $1.85 has declined to $0.415. In the process it has cost investors based on its IPO price (after 1% sales brokerage) over NZ$ 335m or more than a 1/3 billion NZ dollars; a truly enormous sum.

The percentage loss since listing which, allowing for 1% brokerage, is 77.3% at the current share price. Drops like this in such a short time are quite unusual for this type of profitable company.

Also worryingly, at least for New Zealand investors, is the complete pass the New Zealand media has essentially given to the founders and promoters of the company.

Without a functioning financial media to hold business people to account, at least in the public sphere, confidence may suffer even more than it has already.

New Zealand is heading into a slowdown or perhaps a recession for a few different reasons not the least of which is rising interest rates.

Discretionary purchases (such as food delivery) may be among the most affected consumer purchases.

The company has already experienced declining deliveries by number even though the average order amount has increased in the interim six month period.

The company released the following information as part of its HY23 presentation:

Part of Results Announcement

Source: My Food Bag Results Announcement HY23

Recast Revenue Statement

The company’s revenue was down 4.1% at $94.4m.

Its gross profit was $23.9m which was down 7.7% on the pcp. This represented a gross margin of 25.3% which is lower than the pcp’s 26.3%.

Net profit after tax (essentially underlying earnings or earnings from continuing operations) was $6.9m which was down 32.5% on the pcp. This was, however, a better result than the company’s announced net profit from continuing operations of $5.9m.

This is because the amortisation of intangibles was placed further down the recast revenue statement as it is unrealised.

This produced a more encouraging result than the company stated. But it does not change the total earnings.

There is limited information provided in the notes to the accounts on expenses used to calculate operating profits. There may well be other expenses that were not itemised in the notes that may have changed the recast underlying profit figures.

Recast Balance Sheet

The unexercised debt facilities available to the company of $33.933m include $32.5m of a $35m revolving credit facility and $1.433m of a $5.0m overdraft facility.

The company has gone into overdraft by $3.567m and has just $0.134m in cash.

Lease liabilities have increased significantly and are included in the balance sheet under interest bearing debt.

Presumably, the interest bearing debts are subject to covenants. As the intangibles exceed the total equity held in the company by more than $22.0m the valuation of intangibles is crucial to the company.

According to the accounts impairments to intangibles are reviewed annually or more frequently if indicated:

“Impairment testing: Goodwill and indefinite life brands are tested for impairment annually, or more frequently if there is an indicator of impairment. Software assets are tested for impairment when an indicator of impairment exists.” Page 50, Annual Report 2022.

Goodwill and brands have not been subject to impairment in FY22 or the interim period ended 30th September, 2022.

And:

“Impairment Indicators: The Group performs a detailed impairment assessment annually and considers indicators of impairment at each interim reporting date. At 30 September 2021 no impairment indicators were identified.” Page 15, Interim Report 2023.

The audit reports don’t discuss goodwill and brands impairments as a key audit matter.

The next review may include significant impairments as the sole cash generating unit (CGU) stumbles. The discount rates with which the intangible valuations are calculated will rise in a rising interest environment.

MFB has a both basic and diluted net tangible assets per share (NTA/share) of -9.1 cents in HY23 compared to -7.4 cents in HY22.

It has a high equity ratio of 59.3% (although it’s down on the pcp’s 63.3%) and these ratios are completely reliant upon intangible valuations.

Recast Movements in Shareholders’ Equity

The company paid far more in dividends at $9.74m than the total earnings for the interim period of $5.9m and finished the six months with lower equity of $63.2m than that with which it began the period.

Recast Cash Flow Statement

Without the payment of large dividends in the latest six month period the company would have had a positive cash flow even with lease liability payments included using this method.

The payment of these levels of dividends were too high considering the cash left at the balance date.

The company has signaled a reduction in dividends in future periods which will help it's operating cash flow.

The interest bearing debt was an outflow of $1.0m for the period but of course this does not include the taking on of lease liabilities as these are non-cash items.

Free cash flow (excluding dividends) has declined from $10.2m to $1.4m. If dividends are included the free cash flow has fallen from $10.2m to -$8.3m; a massive reversal.

Ratio Analysis

The company had interim total earnings per share (EPS) of 2.4 cents compared to 3.9 cents in the pcp.

Market capitalisation continues to decline; $339.4m at the pcp balance date down to $152.7m at the HY23 balance date. It has gone much lower since the balance date and now sits a little above $100.0m.

All four interim returns on equity percentages have fallen for HY23.

Net debt has increased to $18.5m from just $5.1m in the pcp. Net debts include lease liabilities principal amounts.

Segmental Analysis

The company does not produce any segmental information as it says it operates in one business segment.

Summary

About the only positive thing in the company’s interim announcement was the future introduction of a new inventory picking system which management say will reduce product selection errors and reduce the reliance on labour.

The company’s profits are falling and its debts are rising. The question must by asked; should dividends have been paid over the last year?

The company’s intangible valuations are high and critical to the MFB’s balance sheet health. The auditors must question whether the valuations are fair in an environment of falling profits (affects cash flow forecasts) and rising interest rates (affects discount rates).

It’s concerning that significant impairments to intangibles are not already in the accounts.

Has the time come when banks will start questioning the assumptions in their debt covenants and consequently whether they should lend more funds to this company? The net tangible assets are negative after all.

MFB needs to trade out of its difficulties but profits and cash flow are falling. Suspending its dividends would be a good place to start. This obviously will impact the share price.

The company needs to preserve its cash and find ways to book better profits and improve its cash flows.

It needs to deal with the financial weakness it was listed with, namely the extreme level of intangibles which currently represent 80% of its total assets.

It must create real assets in the face of increasing competition. Significant profits over an extended period are one way and an equity raising is another.