Yowie Group Ltd (YOW) is a Ben Graham net-net – its Net Current Asset Value (NCAV) is greater than the market cap: so if the whole company was purchased at the current share price, and liquidated, and all debts were paid off, the shareholders would be left with a profit.
NCAV is calculated as: Current assets (cash, receivables, inventory) – current liabilities (payables, short term debt, etc) – long term liabilities (long term debt, etc).
Business description
Yowie is a fairly simple business: they make 28g chocolate eggs with a surprise toy inside: similar to Kinder Surprise eggs, for their target market of children. The product is made in the US in New York at a co-packer (contract packer), i.e. this is outsourced. The Yowie staff then distribute the product to retailers. In FY 2021, 90% of total sales were in the US, and 10% in Australia. The picture below shows the product. In FY22 they were successful in getting stocked in Coles, the 2nd biggest retailer in Australia, boosting Australian sales by 53%.
The business model is to create various collections of surprise toys that children can collect, and also to make collections for seasonal buying, e.g. Easter and Christmas.
In the US, the FDA (Food & Drug Administration) banned products which have a non-edible component inside an edible one, but Yowie has developed an FDA approved version of their product, allowing it to sell there. Kinder Surprise eggs are not allowed to be sold in the US: instead ‘Kinder Joy’ eggs are sold, where the toy is kept separate from the chocolate egg.
All figures in this report are in USD rather than Australian dollars, unless otherwise specified, since Yowie makes most of it’s sales in the US and also reports in USD.
History of Yowie:
The Yowie brand predates the current Yowie Group company. It has had a tumultuous history with many ups and downs. The Yowie concept, designs and IP were invented by Geoff Pike and Bryce Courtenay, who formed a company called KidCorp, and licensed their IP to Cadbury to produce it. It was launched in 1997 in Australia, and was extremely successful, selling >1M units/week, and outselling Kinder Surprise e eggs. However, in 2005 production by Cadbury was discontinued, as KidCorp was not able to agree with Cadbury, over the rights to use the IP worldwide.
A new company: Yowie Group was launched in 2014, and quickly grew to have revenues of $20M-$25M, selling their products in the US, but was making significant losses. In Q1 2018, the current CEO Mark Schuessler was appointed, and under his leadership losses were significantly narrowed. However, in 2019, Aurora Capital/Keybridge Capital/Wilson partners made a $19.6M takeover bid, citing poor management performance, so Yowie Group responded by returning $6M to shareholders in FY2021, and fought off the bid. Yowie then made a small profit in 2021 and 2022. Keybridge Capital continued accumulating a stake, and currently holds 34.5% of shares outstanding. The current market cap of Yowie is just $4M USD.
Competition
The main competitor to Yowie in Australia and the US is Kinder Surprise made by Ferrero, plus other chocolate treats from large chocolate companies. Ferrero is a private company so details of margins etc. are not available. Initially, when Yowie was launched in the 1990s, it outsold Kinder Surprise in Australia, but now Yowie sales are much lower than they were in the 1990s. In the US market, Kinder launched the ‘Kinder Joy,’ egg, overcoming the issue of being unable to sell the Kinder Surprise egg due to FDA regulations, and re-entering the market – until that point Yowie had no direct competition in this market.
Gross margins are good, but operating margins are poor for Yowie. With increased sales and scale, operating margins could improve.
Capital Structure
Yowie has a simple capital structure: no long term debt, just current liabilities. There is one class of shares, traded on the Australian stock exchange, and it does not pay a dividend.
Durability, Quality & Risks
Durability:
Yowie makes ~1/3 of its sales through Walmart in the US, so there is heavy reliance on a single customer. There is a lot of unrealised potential in the IP – given the previous track record of sales, in the 1990s and early 2000s with Cadbury. Sales took a hit during the pandemic, dropping 25% in FY 2020, but have since recovered above 2019 levels. There is clearly a market for their products, but Yowie has not achieved sufficient scale to be very profitable.
Quality:
Under the leadership of the CEO Mark Schleusser, SG&A costs have been cut, along with other operating expenses, so that Yowie makes either small profits or losses. In the last financial year, they are tracking at a small loss, citing inflation cost pressures. Gross margins have declined by about 2% since 2018, so they are fairly stable: the issue is most likely a lack of pricing power with both their supplier who makes and packs the eggs, and also their customers, since they are large retailers. Therefore, Yowie lacks pricing power. Looking at the cash flow statement, in 2021, ‘payments to suppliers and employees,’ was $2.2M below receipts from customers, but in 2022 it was almost exactly equal: so Yowie has not been able to pass on increased costs due to recent inflation, to its customers.
In 2022 major expenses are: selling and distribution ($3.9M), then administration ($2.5M – of which $1.3M is employee benefits), then marketing ($0.8M).
This is not a high quality business in it’s current form: however the IP does have significant value, but it is not being fully exploited by the current management.
Risks: cost price inflation:
Net operating losses to carry forward: Yowie has historical operating losses of $7.9M, which it can offset against future profits.
Capital allocation:
Yowie has returned $2.9M to shareholders in FY2020 and $6M in FY2021, after pressure from activist shareholders. It has never paid a dividend. There is a possibility for a further small capital return, but the company also needs to maintain some cash for operations, since it is currently not generating much operating cash flow.
Growth
After fast growth from 2013-2017 where Yowie peaked at $25.7M revenue, it declined to hit a low of $15.6M of sales in FY2020 during the pandemic, then rose to $22M again in FY 2022. In the last 12 months, which comprises the Q4 FY22- Q3 FY23, sales are down about 7% vs the previous comparative period. There may be potential for some more recovery from the pandemic slump in sales.
Litigation:
Currently, Yowie uses Madelaine Chocolate Company to pack their product in New York, but previously had used Whetstone Industries, who had a patent which allowed them to produce surprise eggs that were FDA approved. This patent expired 4 years ago, so Yowie moved to Madelaine. Whetstone then sued Yowie, but all claims were dismissed in Q3 2022, and Whetsone did not appeal, so the matter is closed. Yowie is suing for legal costs, and this is pending, so there may be a small settlement in Yowie’s favour, but they state that it is not likely to be material to their business.
Environmental, Social and Governance Factors:
Environment & Social: Yowie has a very positive message on the environment: the original brand with the six Yowie characters were created to be guardians of various natural habitats in Australia. Yowie periodically donates to biodiversity promoting projects, and promotes the ethos of taking care of the natural world.
Governance
The Yowie board is comprised of CEO Mark Schuessler, previously President & COO of Doumak, and before this COO Sales & Marketing of Doumak, a private $100M revenue US confectionary maker. Other board members include executive Chairman Sean Taylor since Dec-21, (advertising/media career), John Patton (NED) (accountant) and Scott Hobbs (NED) since Dec-21, (previous experience: fast moving consumer goods, sales management of candy bars to Australian & international retailers, since Dec-21.) The CFO is Wayne Brekke, but he is not on the board – he has experience being a financial controller. Finally, there is Nicholas Bolton (NED: non-executive director), who is the CEO of Keybridge Capital, which is a 34.5% shareholder of Yowie. He was banned for three years from 2015-2018, from being a corporate director or manager, by the ASIC (Australian Securities and Investments Commission). The reason was that he breached his duties as a director of Australian Style Investment Pty Ltd, and failed to keep adequate records to explain the financial position of the company. He was a director of 11 liquidated companies that failed to pay their debts on liquidation, which allowed the ASIC to temporarily ban him as a director.
Management compensation:
The board, plus CFO and chief marketing officer were paid a total of $1.1M in 2022, and no share options were granted, which seems a little excessive given Yowie’s low turnover and profitability. The CEO Mark Schuessler made $0.35M.
Risks:
The risks are that Yowie becomes consistently unprofitable, and burns through its remaining cash pile. However, I consider this fairly unlikely due to the large activist shareholder in the form of Keystone Capital, and the presence of Mark Schluessler, the CEO who has a lot of experience from when he was the Doumak COO, about running a confectionary company.
Risks: illiquidity
Yowie is currently being traded on quite low volumes, so any significant buyers or sellers could significantly move the share price up or down. Another consequence of poor liquidity is that there is a significant spread between the bid and the ask prices.
Appraisal
1. Price to net current asset value:
Based on the FY 2022 balance sheet, the net current asset value is calculated as: Current assets (cash, receivables, inventory) – current liabilities (payables, short term debt, etc) – long term liabilities (long term debt, etc).
NCAV = Current assets $13.0M – current liabilities of $4.1M – long term liabilities $0
*note that the current assets have $8.1M of cash, which means that the market cap of Yowie at $4M is just under net cash of $4.1M (cash of $8.1M-total liabilities of $4M).
NCAV = $8.9M vs current market cap of $4.0M
Market cap as a percentage of NCAV is 4/8.9 = 45%
Margin of safety is $8.9M-$4M = $4.9M or 61%.
Values per share based on a share count of 218.568M:
NCAV per share = 8.9/218.568 = $0.0407
The current share price (converted to USD) is: $0.0186.
Summary and conclusion: the Yowie share price dropped sharply recently, on very small volume from $0.04 in mid-May-23 to a low of $0.025 in mid-Jun-23, and at the time of writing is trading at $0.028. The company is currently trading under just its net cash, placing zero value on the receivables, inventory and Yowie IP. Given the history of Yowie, there are various potential catalysts for a re-rating:
Liquidity improvement in the stock: since the share price dropped sharply recently on minimal volume, if buying volume increases, the price could be significantly affected.
Takeover attempt from Keybridge Capital: Keybridge previously offered an opportunistic 0.092 AUD or $0.0632 per share to take over Yowie: but withdrew its offer when Yowie made a loss in that year. Since then Yowie has distributed $9M USD or $0.0413 per share in two returns of capital to shareholders, and Nicolas Bolton joined the board. Yowie is once again valued quite at quite a low price in the market, compared to its assets. Keybridge kept buying shares in Yowie after the takeover attempt failed, last purchasing shares in Feb-23 at a price of $0.042 AUD/share, taking its total stake to 34.56%.
Yowie returns to profitable operation: if Yowie can turn their business around or expand their sales to earn e.g. $0.6M profit, they may be re-rated to a P/E of 10x, which would be a 50% increase from the current share price.
IP licence/sale to, or Yowie takeover by major chocolate manufacturer: the Yowie IP was very successful in the market when it was owned by KidCorp and licenced to Cadburyin the 1990s/early 2000s. If the current directors were able to licence or sell the IP (or the whole company) to a major chocolate company, the IP could be worth much more than the current company market cap. The major shareholder, Keybridge Capital has benefitted from the capital returns done so far at Yowie, but there is not scope for much more of this: so their only way to make a profit other than turning the business around, is to sell their stake in the company. It would be very difficult for them to sell a 34.5% stake gradually over time, given the very low liquidity in the stock, and they would likely be unable to do this at a profit. Therefore, their best option is a sale of the whole business to a major chocolate brand, who can fully exploit the IP, since they can manufacture and distribute at a much lower cost than Yowie, because of their economies of scale.
Disclaimer: this is not investment advice, and is for informational purposes only. Please refer to the full terms and conditions on the Real Worth Stocks website.
