Retail Food Group Shares Drop – Is It A Bargain Opportunity?
Today, Retail Food Group [ASX:RFG] dropped 2.88% to $4.39 per share. The food and beverage company is now down 37.5% for the year. Is it trading in bargain territory?
What does the share price drop say?
First, let’s take a look at RFG’s income statement from FY12-16.
Sales are up 166% to $309 million, and net income has grown 114.7% to $61.3 million. The company has a net margin of around 19.8%. Earnings per share (EPS) was stable until FY16, when it jumped 68% to 37 cents.
If we move onto the balance sheet, the only potential problem is increasing long-term debt. However, RFG covers its interest expense (the amount of interest it pays on debt) more than 10-times over.
The group has continued to grow equity (what shareholders put into the business), generating a 14% return.
Then, if we check out the company’s statement of cash flows, we can see RFG has been increasing free cash flow and dividend payments throughout the years.
So why have the shares fallen by so much?
At the start of the year, UBS Group ceased as a substantial shareholder in the company. According to the institution, new accounting standards could negatively impact RFG. It also sought to downgrade RFG’s target price from $5.70 to $4.70.
RFG has lowered its growth expectations. Instead of 20% growth in net profits, the group expects FY17 profits to only be 15% higher than FY16 figures. Meaning, RFG expects to generate $70.5 million in profits.
What’s next for Retail Food Group?
If you ask me, I think the stock is a bargain. It trades at a 6.66% dividend yield and only costs 11-times earnings. Investors have oversold the group on a 5% growth downgrade. But that’s just a typical short-term mentality. They’re giving no weight to how RFG could grow in the long term.
From FY08-16, RFG grew profitability by an average of 32% each year. Free cash flow also grew by an average of 27% each year over the same period.
This is not to say RFG grew, or will grow, earnings and cash flow by 32% and 27% each year without fail. Growth might drop in some years, and exceed expectation in others.
But over the long term, I believe RFG could yield a great return for investors.
Junior Analyst, Money Morning
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