Quick Look at Murray River Organics (ASX:MRG) as a Potential Investment

Quick Look at Murray River Organics (ASX:MRG) as a Potential Investment


During my research and screening processes I look for three different styles of potential share market investment opportunities:

  1. Great companies at a fair to discounted valuation.
  2. Solid cyclical companies at a large discounted valuation.
  3. Asset Plays – Companies trading at a large discount to their tangible assets.

This is my order of preference, with great companies at the top of my list, cyclical companies second and asset plays third. The reason for this is a great company should keep churning out large profits well into the future, a cyclical company as the name suggests will require you to keep an eye on the cycle and price more closely, and an Asset Play will be an investment you need to watch closely and will usually sell within 3-5 years once the market has realised it’s value or not.

All three styles all based on a value investing framework and my goal is the same for each: ‘To produce long term compounding annual returns over 15% (preferably 20%).’

A Quick Look at MRG

Whilst recently screening for companies I took a quick look at Murray River Organics Group Ltd (MRG). MRG is a potential ‘asset play style investment’ that overtime could possibly turn into a  ‘great company style investment.’

MRG listed on the ASX in December 2016. Here is their prospectus.

After reading the prospectus, their recent updates and studying up on their business here are my notes:

 

Murray River Organics Group Ltd (MRG)

Murray River Organics states they are an ‘Australian producer, marketer, manufacturer and seller of certified organic, natural and better-for-you food products.’

 

Murray River Organics Quick Facts

  • Customers include industrial customers (such as cereal manufacturers, bakeries and confectionary manufacturers), retail customers (such as supermarkets, organic food stores, mass-market, e-commerce retailers and convenience stores) and food service channels (such as speciality and natural food distributors).
  • They operate both in the domestic and international markets, with customers in 26 countries.
  • Products include dried vine fruit, table grapes, nuts, seeds, dried berries, chia seeds, prunes, dried ginger, dried mango, quinoa, coconut products and rice.
  • Founded in 2010 with the acquisition of a 72 acre certified organic dried vine fruit vineyard in Merbein, Victoria.
  • Grown to control over 4,447 acres of certified organic farmland.
  • Owns a certified organic processing facility in Mourquong, NSW.
  • Established a new organically certified packaging facility in Dandenong, Victoria.
  • Completed a significant acquisition – the business of Australian Organic Holdings (including its brand Pacific Organics and Nutritious Foods).

 

What looks good about Murray River Organics

  • Two co-founders own approximately 8.55% of the company each. In total the Board and Management own about 18% of outstanding shares.
  • Operating margin in 2016 was approximately 16.4%
  • Debt to Equity is 52.5% – I prefer slightly lower levels of debt, however I am comfortable with this for this businesses at the current interest rate levels.
  • In their 2016 Prospectus MRG state, ‘The global market for certified organic food and drink was worth AU$104.0 billion in 2014; a compound annual growth rate (CAGR) of 9.5% since 2006’ – This is quite a strong back-wind for the business.
  • There are multiple economy of scale advantages to their business model, by pulling all of their organic snackfood businesses under one roof – farms, processing plants, logistics, sales, marketing, administration, finances etc.
  • Based on current Net Tangible Assets per share of $0.66, MRG is currently trading at a slight discount to NTA at 0.62 cents – but will those assets convert to strong, stable, long-term earnings? Are they over-valued?
  • One of the cofounders families actually owned the original farm that was the basis for MRG and his brother is the operations manager. I like that there is some history and ‘heart’ in this business, I believe people fight harder and work from a more ethical stand point when this is the case.
  • The two co-founders have previously run a business together that appears to have been successfully sold (pending the court case mentioned below). I like that they have work together before, I believe it is very beneficial to have a partner that you have ‘been into battle’ with before, that understands you and can talk honestly to you. After building and selling one business previously, then deciding to go into business together again, I imagine the two co-founders must get along quite well.
  • I like that MRG are building consumer brand names. I don’t like ‘commodity’ businesses as there is often very little pricing power on your side. Whereas a trusted brand can put a few percentage points in your margins as your customers would prefer to by the product that they ‘trust’ from you.

 

Further thoughts about MRG

  • MRG only listed on the ASX in December 2016 with 87.1 million shares outstanding at a price of about $1.20.
  • At the time of the IPO the two co-founders of MRG have an outstanding legal case related to the sale of their previous business. I don’t know the full details of this and have not yet seen any finalisation of the case, but it is something that makes me a little cautious about investing. Saying that even Warren Buffett has been wrapped up in multiple court cases over the years, so I’ll give this the benefit of the doubt until I learn more.
  • One of the cofounders families actually owned the original farm that was the basis for MRG and his brother is the operations manager. I like that there is some history and ‘heart’ in this business, I believe people fight harder and work from a more ethical stand point when this is the case.
  • The two co-founders has previously run a business together that appears to have been successfully sold (pending the aforementioned court case). I like that they have work together before, I believe it is very beneficial to have a partner that you have been into ‘battle’ with before that understands you and can talk honestly to you. After building and selling one business previously I imagine the two co-founders must get along quite well.
  • Since MRG has only been listed for a short period of time there is not as much historical financial information available as I would like.
  • There are a lot of potential ‘heartaches’ in this businesses future with many variables such as exchange rate, interest rates, weather, commodity prices and the like being largely out of MRG’s control. However, I do like that they have diversified their business model to allow for this by preferring to focus on products with long shelf lives, spreading their farming properties geographically and increasing their customer bases internationally.

 

Conclusion

  • I can see the potential in MRG, but I can also see potential for tough times. These tough time however could possibly produce opportunities to buy in at cheap price.
  • Ticks a lot of the boxes that I look for in an investment, but I find it hard to make a strong decision without a 5-10 year financial history to gain a better understanding of managements capabilities.
  • I would like to better understand how MRG’s management fell about debt and capital raising. the fact that management have an approximately combined total of 18% shareholding gives me some comfort that the are thinking about the long term shoreholder rather than their short term incentive bonuses, which I don’t believe is the case with all listed companies.
  • I’ll do some more research and consider MRG for my Watchlist and then determining a potential buy price.

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Enjoy the ride!

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DisclaimerPlease remember, I don’t make recommendations, give advice or manage others money – If that’s what you are after, sorry I or this website can’t help you (see the TOS). Readers should not rely on information contained in Shared Investor for Share market, equities, securities or any financial related decisions but should seek licenced professional advice.  Shared Investor does not give or purport to give investment advice or make any recommendations whatsoever in relation to any securities mentioned in Shared Investor.  What I do is purely share my story and my investments exactly how I manage them.  I do this as I believe there is great value and enjoyment in observing the experiences of others, especially when it comes to investing.  Enjoy the ride!

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