Whole Earth Brands Inc. (FREE:NASDAQ) missed Q2/23 revenue and EBITDA expectations but continues pursuing growth opportunities, reported ROTH Capital Partners analyst George Kelly in an August 9 research note. The company provides sweeteners and sugar substitutes for consumer food markets.
"While the operating environment remains challenging, management is taking prudent steps to improve the cash flow profile of the consumer packaged goods (CPG) and flavors businesses, and we believe the ongoing strategic review process could be fruitful," Kelly wrote.
Projected Gain Compelling
As such, ROTH reiterated its US$5 per share target price on Whole Earth, currently trading at about US$3.90 per share. Based on these prices, the potential return for investors is 28%.
The Illinois-based company remains a Buy.
Performance During Quarter
Kelly presented Whole Earth's key Q2/23 financial results.
Q2/23 revenue was US$132.9 million (US$132.9M), below ROTH's US$139.7M forecast. Similarly, EBITDA fell short, at US$18.2M versus US$17.7M.
Gross margin, however, was 25.1%, a sequential improvement.
The lifestyle firm reiterated full-year 2023 guidance: US$550–US$565 million for revenue and US$76–US$78M for adjusted EBITDA.
Whole Earth ended Q2/23 with net leverage of 5.3x.
"The company entered a fixed rate swap to reduce the impact of rising rates but still faces a greater than US$40M interest rate expense annually," noted Kelly.
Opportunities By Business Segment
Kelly discussed Whole Earth's two business lines, Consumer Brands and Flavors & Ingredients, both of which fared worse in Q2/23 than previously.
As for Consumer Brands, which include Equal, Canderel, Swerve, Pure Via, and Whole Earth Sweetener, it declined 1.7% from Q2 of last year due to a 6% drop in volume. This was somewhat offset by increased pricing, though.
Kelly noted that consolidation of the company's legacy business under the co-manufacturer could lead to more opportunities for this segment. This move is expected to be done by the end of Q3/23.
"Management feels good about the potential for share gains moving forward and into 2024 as it rolls out new products and improves service levels," Kelly added.
Regarding Flavors & Ingredients, growth slowed in Q2/23 as compared to Q1/23. However, Whole Earth remains focused on this segment which is expected to drive growth in the medium term.
Opportunities exist to expand the use cases of the company's products, especially as a PFAS replacement, in various industries, including health care, food, and industrial. As new use cases are added, Kelly pointed out, the segment's roughly 30% operating margin should be flat to slightly higher.
Strategic Review Continues
Kelly wrote that the Whole Earth board of directors' review of strategic alternatives, including consideration of Martin Franklin's buyout offer, is still in process, but no indication has been given of when it may be completed.
"We continue to take this seriously as we believe the acquisition offer is real and being considered and that Whole Earth's businesses carry real value," Kelly wrote.
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Disclosures for Roth, Whole Earth Brands Inc., August 9, 2023
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Disclosures: ROTH makes a market in shares of Whole Earth Brands, Inc. and as such, buys and sells from customers on a principal basis. Shares of Whole Earth Brands, Inc. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities.
ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high degree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without the express written permission of ROTH. Copyright 2023. Member: FINRA/SIPC.
