FREE (Update)

Please note, this is an update to Whole Earth Brands Inc (FREE) - Long (Update), most recently presented on 1/22/2021.

Publicly traded companies mentioned herein: Whole Earth Brands Inc (FREE)

Highlights

The presenter reiterated his bullish take on FREE, which is a branded CPG company with 80% of the business in low- or no-calorie healthy and organic sweeteners, such as the Whole Earth brand at supermarkets. They also have some food service exposure outside of retail, and the remaining 20% is licorice-based flavors and ingredients. 

The SPAC was announced in 2019, then the deal price was revised lower in mid-2020 due to COVID. It’s a good CPG business in which revenue growth should be in the low- to mid-single digits and EBITDA growth in the mid- to high-single digits due to healthy eating trends in the baking and sweets categories. Near term, it’s going to be faster due to cost saves and synergies from acquisitions. 

FREE’s an attractive free cash flow business with 17% EBITDA margins. The company is 4x levered and has about a 15% levered or roughly 10% unlevered free cash flow yield. The stock is trading 8.5x 2022 EBITDA vs. their branded food peers at 11x - 13x. Gross margins are in the 35% range like other branded food companies, and CAPEX is ~1.5% of sales.

We think a re-rate higher is justified as the company demonstrates more consistent organic growth. Our target price is $19 - $22 which would be 60% - 80% upside at 11x - 13x EBITDA.

Because this is a SPAC that’s also levered, we see it as sort of penalized twice here in the selloff of SPACs broadly. The stock is down almost 20% since the end of June despite packaged food stocks being flat to up during that time as those have benefited somewhat from the COVID resurgence. 

It’s necessary also to parse through some noise on this company’s historical results. While they reported -1% organic growth in 2020, once you back out a one-time business loss, that growth was +3% even in the face of their food service business being hit hard by COVID. Guidance for 2021 is 3% - 5% organic growth and going forward we see 5% growth in 2022.

Acquisitions have made the company a faster growing and better business, which are now 45% of the overall business. They are acquiring Swerve (announced Nov. ‘20) and Wholesome Sweeteners (announced Dec. ‘20), both acquisitions being right in their wheelhouse with lower brand awareness and distribution – creating significant synergies. On a fully synergized basis, these two companies are being acquired for high single-digit multiples. In terms of catalysts, we expect more consistent organic growth coupled with rapid delevering. If they announce any additional acquisitions, we think that also would be positive for the stock.