I once have someone asking me, how do I decide which stock to study? Do I find the industry that I like before selecting which company within that industry to research on? To be honest, I take a bottoms up approach. Meaning, when I come across a stock, I must first get pretty excited after taking a quick look at it and its valuation. Once I get excited, only then I will be incentivised to expand my circle of competence and dig even deeper.

In other words, I must smell money. I can’t really explain how to “smell money”. But you are in luck, because this time, I am going to share where I have been “sniffing”.

BUT FIRST, A QUICK DISCLAIMER:
Whatever I am going to share here may sound exciting. But I must also tell you that it is not a recommendation to buy/sell or hold any form of securities. I am here simply to share my research and opinions. It is up to you to conduct your own due diligence before taking any action.

Now that we got that out of the way, I would like to share with you the company I have been looking at:

Wide Open Agriculture (ASX:WOA)

This company was brought to my attention by a very good friend but I think many of you will be delighted to know as well. The company currently has a market capitalization of about A$ 74 mil and a price/sales valuation below 20x.

In this article, I will share the good and the bad so that you have 2 sides of the coins to consider. I will first like to attempt to ruin your appetite for this stock. So…

Let’s start with the BAD…

Its Financial Statements Are An Eye-Sore

When I say eye-sore, I mean it. True, revenues are growing. But take a look at everything else below it. Gross profit margins are coming down, expenses significantly exceeding their revenues and despite the growth, the company swung deeper into the loss. The worst part is that like many other companies listed on the ASX, they provide little to no clarity behind these numbers.

The cash flow statement is no different. From the operating activities itself, the company is bleeding so much money.

Thankfully, their balance sheet is loaded with cash which is 5x their total liabilities. Therefore, they should be able to continue chugging along for a while.

However, despite such numbers, if you had bought this company from IPO, you would have nearly tripled your capital.

So, loss making company, with the ugliest income statement and cash flow available, yet outperforming the market? What on Earth is going on here?? With such poor numbers, it’s probably severely overvalued for now and can come crashing down anytime. Most investors would have their appetites ruined by now.

Apparently, it doesn’t bother you… because you are still here…

Let’s Now Look At The Good

I have vested interests in this stock. And again, it’s because I smell money. It’s not easy to explain how I can smell money. Perhaps I can explain better with this case study.

Firstly, what does the company do?

Simply put, this company is involved in the marketing and distribution of various food products. The food they sell are mainly focused around regenerative farming. If you want to learn in detail what regenerative farming is, you can refer here.

I will simply show you a picture so that you can tell which farming practice is better:

The obvious answer will be regenerative farming. This is because not only does it grow crops, the practice also ensures that the earth continues to be fertile, uses less fertilizers and helps greatly with global warming.

WOA has 3 different business units, all of which compliments each other:
- Selling & Marketing of regeneratively farmed produce under the “Dirty Clean Food (DFC)” Brand
- Selling & Marketing of oat milk under the “OatUp” Brand
- Lupin Protein Technology development

The Dirty Clean Food (DFC) Brand

When I say produce, its not vegetables, but poultry as well. The company basically invests in land, or gets investors to invest in a plot of land and rents it out specifically to farmers who are committed to regenerative farming practises in the Australian Wheatbelt region.

WOA will then buys these produce from these farmers and sells them to the users either though retail stores, specialty retail stores, foodservice restaurants and online.

Here’s some of the value proposition of WOA to their customers

Apparently, customers love it because this business unit alone is growing consecutively for 8 quarters.

Consumers who purchase from them are not only advocates of global warming and eating as healthy as possible, but the company has also done well to ensure that the revenues are less cyclical by introducing a subscription service. You can see it on their DFC website

This reminded me of another company called Chewy Inc. Pet owners will know that they need to buy food for their pets every month. Instead of having their customers go online every month to shop for pet food, Chewy created a program called Autoship which allowed customers to automatically have their favourite pet foods delivered to their homes every month. Therefore, it made their revenues less cyclical. I can see that WOA is launching a similar program on their DFC website. It not only conveniences the customer, but it also helps customers develop a habit towards DFC’s products. Kinda like how some of us from Malaysia or Singapore who got used to the taste of Milo and must have it regularly. Personally, I feel that this segment is the cash flow generator for the group. It is the most stable business unit currently.

The DFC Brand is also being accepted by the community very quickly. They are also growing their sales quickly from other channels such as retail and Foodservice & Wholesale.

Lupin Protein Technology

Australian Lupin: The newest superfood on the block

Next, let’s talk about Australian Sweet Lupins. It is considered as one of the best superfoods to consume with its low glycemic index, low cholesterol, high protein and high in fiber.

However, did you know that more than 60% of the lupin production globally hails from Australia? And only 4% of the world’s lupin produced are consumed by humans. 96% of them are instead fed to livestock! The reason for this is due to its texture which is not easily consumable by humans. Such a superfood fed only to livestock. Imagine!

However, WOA, together with Curtin University of Australia, managed to unlock a technology which enabled it to gel and thicken and at the same time, make it tasteless. They call it the Modified Lupin Technology. This makes the product very suitable as raw ingredient for a number of other products such as Plant based meat, protein drinks, and so on. And the market is huge.

This business unit boasts huge promises. However, the downside is that it is not generating a single cent in revenue. It is still in development phase meaning that we have to keep very close track of its progress.

The good news is that WOA has actually gone past the product development stage. On December 2020, the company announced that they have successfully produced food grade lupin protein isolate and can be applied to a wide range of food sectors.

With the successful development, WOA next proceeds to exercise their rights to the exclusive global license. By doing so, they have total control of the intellectual property. In return, WOA will pay Curtin University royalties when using the intellectual property.

The next question would be, how long does the Exclusive global license and its patent last? As you can deduce from the announcement here, 10 years!

Then In July 2021, the company announced the progress of their developments to investors…

Later on 7th of October 2021, the company released another update saying that leading food and ingredient companies have received samples of the modified lupin protein.

Personally I am expecting delays. But it looks like the company is on track!

Imagine multi billion dollar companies such as Beyond Meat or Impossible Foods deciding to utilize their lupin protein to create their products. How much will the revenue of the company grow?

OatUp Brand

Wide Open Agriculture posts quarterly revenue results of almost $1m

Oatup is WOA’s brand of Oat Milk that has recently hit the market in Australia. Firstly, why get excited about oat milk? Simple, because it is one of the fastest growing product in the plant based milk category

More and more consumers are today are switching to a plant based diet for a wide variety of reasons ranging from health, to personal mission and even to look good. Oat milk is growing faster than most plant based milk categories because its the closest alternative to dairy milk.

Today, oat milk is becoming the 2nd most popular milk, replacing soy and 1 step closer to taking the crown from Almond milk.

We can also see here that oat milk produces the least amount of emissions and uses the very little resources compared to most alternative plant based milks. Therefore, it is becoming a more popular choice for environmentalists.

What convinced me further was when I took a closer look at Oatly’s financial performance.

Oatly is a company that specializes in selling oat milk and related products. It is considered the leader in this space. And from their financial reports, we can see that Oatly is growing quickly in almost all of their markets especially Asia. So, do I have reasons to be excited about oat milk? You bet!

But with so many different oat milk brands in the market, what will make Oatup stand out? They used to brand themselves as the only regeneratively grown oat milk. But that doesn’t catch my attention until one day, WOA revealed their secret weapon… High Protein Oat Milk .

I bought oat milk from different brands before. It’s quite nice. The only complain is the low protein content. But when WOA discovered the modified lupin technology, they successfully added that their oat milk as well. Adding protein to their oat milk will definitely differentiate the product from the competition as it will catch the eyes of the consumer on the marketplace.

In the mean time, the company is busy creating all kinds of products under the Oatup brand to stoke consumer demand and curiosity.

And the best part is that the company is not waiting to distribute their products globally. They are already steam rolling across Australia and the first stop in Asia will be in Singapore!

You can also follow OatUp on their instagram page. You can see that many baristas and specialty retailers are starting to adopt their product:
https://www.instagram.com/oatup.au/

Management

With small cap companies, the success and failure of the company lies heavily with the management. The team has so far executed very well and that is the reason why I am putting my trust in them for now. Track record counts for me. Let me introduce you to the team, starting with the board of directors:

The company is founded by Anthony (Maz) Maslin. In July 2014, tragedy struck his family when his kids and their grandfather were victims of the MH17 plane being shot down in Ukraine. When they got the news, Maz and his wife was very traumatised and described it as living in “hell”. However, they needed to find meaning for their lives again and founding of various companies such as Wide Open Agriculture has delivered.

According to Maz,

“Most of the Wheatbelt communities are dying. The people are leaving, the schools close and the environmental degradation is terrible. We want to build a new food and farming system. Wide Open Agriculture for me is just honouring the kids. I’m trying to live my life in a positive manner because it’s the only choice that I have.”

"Wide Open Agriculture came about as the result of a discussion I had with (WOA partner) Commonland’s Hans Schut, when I was looking to find some meaning, some reason for living. WOA has delivered on that. Doing something that brings hope and inspiration to everyone involved is meaningful, rewarding and exciting work. The highlight of my day is when I see the same inspiration on the faces of new people who are introduced to the company."

From here I can see that it is a passion project of his to run and grow Wide Open Agriculture. It kept him alive and gave him purpose following the tragic incident involving his children. This is a good sign for me as it tells me that he’s not doing this purely for the money.

The managing director of the company is Ben Cole. Ben has a PhD in environmental engineering which probably explains why he is passionate about regenerative agriculture. He has been involved in several entrepreneurial projects in the past, mostly involving developing countries. Unfortunately, there is little I can find out about Ben and his management style. However, he did participate in various interviews which I found to be very insightful.

Out of the 6 board of directors, 4 of them have extensive experience when it comes to agriculture, fresh produce marketing and distribution. So far, this is a good sign.

We can see similar experience and background in the executive management team as well. Most of them are experienced in the Food & Beverage industry.

In terms of shareholdings, 3 of the board of directors collectively holds about 16.5% of the company. The top 2 spot are held by related parties from the Commonland Foundation. The Commonland Foundation and Fanja Pon, from my diggings come from Pon Holdings based in the Netherlands. Interestingly, Pon Holdings are well known in the automotive sector there. However, it seems that they also have ventures in agriculture with the aim to “transform degraded landscapes into thriving ecosystems and communities based on sound business cases and aligned with international policies and guidelines”. I am still digging up more about them.

It is worth noting that 3 major shareholders are committed not sell any shares until July 2023.

However, the most important metric for me is the track record of the management team while they were leading the company. And so far, under their leadership, the team have executed their plans very well. We can see this from the progress of OatUp and Modified Lupin Technology developments.

Potential Risks V.S. Potential Rewards

Potential Rewards

WOA’s revenues is currently below A$ 5 million.

The question is, how big will the company be once they have unlocked the value of the OatUp and Lupin Technology business units?

Look at the size of their market. It’s in the billions of dollars. We have not even covered protein shakes and powders. The plant based product movement is really gaining steam globally as the saying goes, “A healthy lifestyle never goes out of style”.

Remember again, WOA’s revenues are currently less than A$ 5 million. Imagine if the market size is only $10 billion and WOA captures only 1% of that market. That’s $100 million in revenues for them. The company would have grown 20x in size. But now the total market size is worth many times more than just $10 billion. My first question is, if WOA captures just 0.1% of this market, will their revenues be many times bigger than just A$ 5 million? Their market capitalization is current hovering below A$ 80 million. If they succeed, will this be just an A$ 80 million company?

Look at some other companies in this space currently:

Does WOA have a value proposition that differentiates themselves from these different companies? Can they execute their strategies well?

With the Modified Lupin Technology and High Protein Oat Milk, I personally believe they have a differentiating factor that can help them grab market share. Looking at their progress so far, I am also confident as of now they are able to execute.

Potential Risks

Here are some risks that I am currently aware of and paying close attention to:

Pre Revenue & Execution Risks
Although execution and progress is going well, there revenue generated from OatUp and Modified Lupin technology is limited. In fact the Modified Lupin Technology have not generated any meaningful revenues. There is always a possibility that food manufacturers will choose not to use their modified lupin no matter how attractive it may be. If execution fails, get ready for a very painful drop in share price.
Competitive Pressure
There is a lot of competition that WOA have to face before they can become number 1. For example, in the OatUp division, they have to compete with companies like Oatly who is currently #1 in the market for oat milk. And although there are plenty of benefits to using consuming protein I believe there are also plenty of other substitutes for their modified lupin technology.
Funding & Dilution
WOA’s balance sheet is currently loaded with cash. They have more than enough money to pay back ALL their liabilities. However, we must also know that they are bleeding cash at this point and that could eat up into their cash pile. Although the Dirty Clean Food division is generating revenues, it is just not enough. And with the lack of explanation to their financials, we can never know for sure when will they ever be profitable.

Therefore, they rely on external funding in order to carry on the business and its developments. The good news is that investors are still willing to pour money into this project.

But while it is good that new shareholders are willing to continue funding the project, it is also worth noting that existing shareholders will be diluted. Meaning that each share will be worth less.

However, as of this point of time, I believe the funding is critical to help WOA realize their plans and unlock its value. Without the funding, they will probably remain a A$ 5 million revenue company and the shares I am holding will not be worth much. But with the funding they can continue executing their plans to significantly increase its revenues, making my shares more valuable.

Putting It All Together

Perhaps up to this point, you can see why I am sniffing up this alley. I am attracted to the potential upside. But I make sure that I acknowledge the potential downsides as well. The important points to keep track of is the company’s execution. I want to see revenues continue to grow and more importantly, a path towards profitability with improving gross and operating profit margins.

This style of investing for me, is more like a venture capitalist. An investment of asymmetrical proportions whereby the risks are contained (100% maximum loss) whilst the upside is unlimited. You should know by now that I have vested interests in this company. And with vested interests comes bias-ness which is also the reason why I insist that you do your own due diligence before taking any action.

Other than that, hope you enjoyed this little sharing. If you enjoyed reading so far, do consider joining my little Telegram Channel or following me on social media to learn more. Cheers!

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