Each week I’ll be picking a random ASX stock that I’ve rarely seen discussed online – and that I do NOT hold – that you voted for, for us to dive into for some Due Diligence (“DD”).
This is for us to have a look at what it does, comb over their financials, and conduct some polling on general sentiment. Not all of these stocks may be sexy or appealing; the whole point is to shine a light on what companies are doing out there on the ASX which never get much coverage – for good or bad.
The main purpose being to add some more variety in coverage to the standard blue chips or meme stocks we see pumped day in and day out, and hopefully discover some hidden gems or innovative companies on the Aussie market.
Here’s this week’s Random Stock of the Week.
Company name: Yowie Group
Ticker: YOW
Industry: Consumer Discretionary
Headquarters: Perth, WA
Market cap: ~$12m
Current share price: ~$0.05
1-year Performance: +21.5%
What they do, smoothbrain version: like a Kinder Surprise except you bought it off Gumtree.
What they say they do, wanky version: “Yowie Group Limited is a global brand licensing Company, specialising in the development of consumer products designed to promote learning, understanding and engagement with the natural world through the adventures and exploits of six endearing Yowie characters.” 🍆👋
What they do, actual version: Western Australia-based Yowie Group (ASX:YOW) are a consumer discretionary company whose chief product line is a range of branded chocolate confectionary products highlighted by their “surprise-inside-an-egg” chocolates which contain varying lineups of collectable toys.
In addition, the company runs a digital and content platform centered on a group of six main characters based on the Aussie legend of the “Yowie”, along with associated intellectual property and entertainment products & digital media oriented at kids.
Much of the business’ chief messaging is oriented around pushing pro-environmental and sustainable education, including educating children about the importance of conservation and awareness of endangered Australian species.
YOW’s consumable product itself also follows a similar theme, consisting of sustainably-sourced 100% milk chocolate that’s “every-possible-hipster’s-allergy-free” (gluten, nuts, GMO, etc. etc.)
The company trades their products in Australia and the USA, with the latter having become the chief area of growth. This includes distribution via larger retailers as well as grocery & convenience stores, with the main driver coming courtesy of Yowie’s partnership with the Walmart chain of megamarkets in the US.
Yowie also build engagement via their digital offerings which include a series of quizzes and games, as well as an app used to trace ‘collections’ of toys collected – similar to an Aussie wannabe version of Pokemon.
This encourages a level of FOMO similar to Aussie pennystock investors who want round out their portfolio with every possible Lithium speccy miner; with the idea that kids will continue to bug their mothers to repeatedly buy more Yowie eggs until they have completed the whole set.
Each new series of toys that comes out, the process repeats itself, and creates a level of recurring revenue.
Having been listed on the ASX for over 20 years, Yowie Group has had quite a tumultuous history for such a tiny company.
Board takeover attempts, power grabs, court cases, forced retirements and more combine to make its background sound like something out of an Aussie version of Succession, just a chocolatey-er one with far fewer private helicopters involved.
Competing institutional investors vying to place members in positions of power on the board, seemingly random returns of capital while the company is not profitable, and various other backstabby and drunken management decisions would be even more comical for a $12 million dollar market cap company… if it wasn’t for the fact that shareholders were losing plenty of actual money along the way.
That fact likely ties into the fact that the company itself has been unprofitable for pretty much the entire available financial history that still exists online.
Even at the time when its share price hit its absolute all-time peak of $1.17 towards the end of 2015 (when the company had just signed a licensing agreement with Angry Birds – remember them? – for distribution of their figures) it was losing around $9 million per year.
Bear in mind, this is not some cutting-edge, life-changing technology company people are typically willing to price in multiples for… they sell kids’ chocolates, for fuck’s sake.
These losses hit an all-time-high in 2017 when YOW lost nearly a cool $11 million; when they released this news to the public in their financial update for the period, the stock plummeted and then went on a multi-year down trend ever since.
The next ~5 years were essentially a series of staggering lowlights for the company, with its operations marred by petty infighting amongst key investment groups vying for influence over Yowie’s operations and board seats.
The saltiest of these was investment group Keybridge Capital, who after obviously seeing massive declines in the share price called for multiple attempts at getting existing board members sacked – including engaging in litigation – while continually acquiring more shares to increase their voting power & stranglehold over smaller investors of the company.
Other investor Aurora Funds Management also had a say, having a hand in a board member of their own take a seat as well. They were both eventually able to ensure new board members with backgrounds in finance and IT ended up with board seats from the end of 2020 onwards.
This was despite the existing board members who had started to turn Yowie’s ship around lately having prior experience in fields such as confectionery & FMCG, one of whom notified of his intention to ‘retire’ in 2021 (more on this below).
A couple of years’ worth of cost-cutting measures and one Covid-lockdown-lucky-boom later, and in financial year 2021 Yowie actually reported its first profitable year of business in memory after several consecutive quarters of stronger performance & increased revenue.
For the first time in nearly a decade, Yowie’s share price experienced a gradual uptick, recording a 21+% investment return over the past year.
So, as we sit here in 2022, does this memest of meme companies (well, 2nd-most, second only to you-know-who) actually now warrant some of your investment dollars moving forward? Let’s take a look below.
Yowie Group are based in Perth, WA and listed on the ASX in 1999. The company has returned investors -2.45% (with no dividends paid) per year annualised over the past 10 years.
What looks good:
- Yowie experienced a 46% higher grand total of sales year on year for 2021 over 2020, as Covid lockdowns had a positive effect on the sale of chocolate and confectionery goods and non-tourism discretionary spend across the globe.
- This led to a profit after tax of US$0.98 million, compared to a loss of around $6.8 million over the previous year. Yay, progress…?
- Its current market cap is still pretty damn low considering what hey have asset-wise. An AUD $12 million market cap for a company that has around US $8 million in cash means it’s basically valued at its cash-value not taking into account any inventory, intellectual property, distribution network & agreements, etc.
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At the current share price you’d essentially be “buying its cash” and then getting the rest of the company “for free”. Currently its total assets are valued at just under US $13 million – more than its market cap.
- That $8 million US in cash is down on the previous year, but the company used some to build inventory in case of supply chain issues (which turned out to be prudent).
- Yowie Group has no debt, and hasn’t for any of its past recent history. So that’s something in the favour of management’s financial acumen, I guess:
- Management have indicated that moving into the end of 2021 they have a backlog of orders, an indicator that their product is still “in demand” at a base level.
- Yowie has a strong social media presence with high engagement. That might not sound like much, but it’s important for direct to consumer retail – particularly on Facebook, in which it is undeniably a winner with the ever-valuable “mums buying kids items they don’t need” demographic:
- Likewise, the company’s conservation / wildlife-centric angle gives them a good base “engagement-bait” content catalogue to use that works particularly well on social (images of cute animals + positive conservation messaging) = “Karen Jones likes this ❤”
- Yowie’s creative team has proven they can produce YouTube videos that get incredibly high levels of engagement, with some of its most popular boasting several million views:
- The company boasts some decent, cute intellectual property for kids that could translate to them pivoting well into more of a ‘content’ company rather than just a chocolate producer with some animated stuff on the side.
- With effort put into better cartoons, etc. to build YouTube presence, and the odd in-house-developed app-game with more microtransactions built in, there could be potential for an untapped revenue stream here that would rely less on supply chains and distribution of physical goods.
- In the past, the company has brought on board members with confectionery / FMCG experience including chocolate-specific job roles, with brands such as Mars and Campbell Soup represented.
- As the world has been opening back up, positive trends in retail consumption rates & consumer discretionary spend have likewise increased as people still remain fearful/hesitant to spend their money on travel:
- At its heart, pro-environmental messaging to kids is no doubt admirable, not only from an ethical perspective, but also a marketable “ESG” perspective. An investment in Yowie is putting money behind positive and worthwhile messaging, if nothing else.
- Based on its most recent positive earnings report to end 2021/start 2022, the company is trading on a P/E of about 5, which puts it well under the industry average of both the market and the Aussie food & consumer discretionary companies on the ASX.
- Has not required any capital raises and/or caused dilution of the share registry that have caused shareholders additional pain on top of everything else.
- The recent strength of the Australian dollar could be working in the company’s favour given its dual operations in the US/domestically.
- Its share price has been on a consistent up-trend for the past ~year; at least all the potential green from this change in sentiment may encourage investors who otherwise wouldn’t have given YOW a look at all in the past by decreasing the “scare” factor somewhat.
What doesn’t look good:
- Was this temporary boom in sales only a result of an upswing in chocolate consumption during Covid lockdowns, and unsustainable moving forward? Regardless of how well management have done recently to cut down on unnecessary capex, it can’t influence the bottom line enough if its only recent positive year was because people were gorging themselves on chocolate while locked at home.
- Institutional ownership of YOW is quite high; while we usually would look at this as a positive for small and micro-cap companies, in this case it seems to be the opposite case & the source of much of its share price misery. Much of this has been the result of the infighting for board control from its insto’s – again, so unusual for such a small company.
- For this Institutional investment ownership, one can’t help but wonder what their actual intentions are. Are they aiming to raid its assets and finances? Why are they so strongly on board for control of a company that just continually loses money? Are there some hidden positives such as tax benefits for supporting companies with ‘environmental’ messaging?
- Being so reliant on one single centre of distribution – Walmart – in the US is risky. Companies such as this are almost entirely dependent on maintaining consistent levels of shelf-space visibility in order to get their product in front of consumers’ eyes; should this dissipate, it would be a big blow to the company.
- As a stock, it’s incredibly illiquid and experiences very low trading volume (an average of around ~$6k worth of shares traded per day). It likely trades at a discount in part because of this alone, as people fear getting trapped in the stock in the event of bad news.
- Despite pushing itself as also a “digital brand”, Yowie’s website receives pretty miserable quantities of web traffic per month. While a lot of its brand interaction probably takes place on un-owned media such as Facebook & YouTube, it’s not a great reflection of the pull of their own owned website as a hub portal:
- The company experiences pretty crappy operating margins at around 9%, and anything that cuts into these even further – such as increased costs of labour or supply chain increases – would cripple profitability even further.
- The business has simply proven very hard for management to scale over the years. Any big increase in marketing/advertising spend has mostly just resulted in money being thrown into a pit rather than any longstanding or sustainable volume growth.
- Its key product lost its advantage as the only “toy in chocolate” status upon the launch of Ferrero’s Kinder Surprise many years ago, which has since dominated market share in this incredibly niche space:
- Inflation & rising costs of living worldwide since 2022 began & the Ukraine war hit may lead to many families “buckling down”, having to spend a greater proportion on their wallet more on essentials and less on frivolous products such as whacky toys inside chocolates.
Summary: Sometimes when looking into a stock’s background and fundamentals the mind immediately glazes over, and goes beyond the detailed financials and minutiae of operations of the business. Instead, a single, simple question forms in the mind: why is this company even listed on the ASX?
Given all the listing and administration requirements, constant disclosure consistency levels (which the company has often failed to meet) and overall level of disinterest in the stock in the eyes of retail investors, surely it would just be easier for everyone to take the business private?
Sure, fundamentally the business might have finally turned around over the 2021 period and be actually trending in the right direction, but as an investment the question keeps coming back to opportunity cost.
With nearly 2,000 other companies on the ASX, why would you want to invest in YOW over about 1,000 other more solid businesses with more proven business models, track records, and growth indicators? Not just in the consumer discretionary, but basically any other ASX sector?+
Especially one with such an awkward history of management and cancelled takeover attempts, and in a current state in which the contentious status of the board seem to have opposing views, goals and business priorities for where this business is supposed to go and what it’s supposed to be.
The ongoing need for Yowie to negotiate & maintain favourable pricing terms with suppliers for chocolate and toys is crucial moving forward, and it remains to be seen if the current board are here to pursue actions like this or simply pocket directors fees.
How another quarter with inflationary pressures factored in (both to their production/supply chain and to their consumer market) will be interesting to see – IF it’s another positive couple of quarters, then it may be enough of a sign for a re-rate.
It’s a shame, because on an asset level YOW looks fairly undervalued, but other than that the investment case is not very strong. Other than wanting to support an Aussie business with “feelgood” messaging, or if you believe they are onto something with potential for more monetised growth in their digital platform, there’s not much reason for parking your dollars here.
If you want higher risk, higher reward investments, there are better to pick elsewhere on the ASX. Likewise, if you’re after small or micro-caps with no debt and that are profitable, there are plenty better to choose from as well.
Conclusion: At a base level, this is a business that at the very least, does look improved compared to recent years. An effort to at least decrease spend, and optimise operations is a positive enough story albeit coming off a very low bar.
If you were ever determined to invest specifically in YOW in the past for whatever reason, now probably looks like one of the best times ever to do so.
However, in my book this is still something I wouldn’t go near. Because while them finally becoming profitable might be a “nice” story, there’s simply no real justifiable reason to put your money here over other companies outside of some vague desire to back some ethical messaging that may make kids smile.
This goes doubly-so when that money is probably instead just going toward lining the pockets of some petty institutional investors. A shame, because kids could use anything they can get to make them smile a little with how the world has been the past few years.
For shareholders of YOW, likely the only thing that is going to get them smiling for more than 5 minutes in future is the possibility of a proper takeover that actually finally goes through, or a premium paid for the company before taking it private.
Or accepting that a tiny chocolate seller with still-underway court cases is probably never going to be a massive drawcard to retail investors.
Company website: https://yowieworld.com/
MarketIndex page: https://www.marketindex.com.au/asx/yow
Feel free to add your own opinions on YOW in the comments below.
Would you buy this stock? Why or why not? Feel free to vote in the poll.
