Is Farmmi (FAMI) a Buy Under $1?
Farmmi Inc (FAMI) is a Chinese holding company, engaged in the processing, distribution, and trade of dried edible mushrooms. The company mainly distributes Shiitake and Mu Er mushrooms, as well as other agricultural products, such as rice and edible oil.
The company aims to build a global trading platform for agricultural products that provides sustainable, organic, green agricultural products and food. The company also integrates an internet platform, offline experience shops, family farms, and factories, where it sells non-fungi agricultural products such as crabs and oranges.
Since the beginning of the year, FAMI’s share dipped 69.69%, underperforming broadly its benchmark, the Invesco DB Agriculture Fund (DBA), which gained 20.20% year-to-date.
FAMI had a lackluster stock performance over the year and its current valuation is undervalued compared to its book. Given this context, I will look into the company’s financials and its growth perspectives and see if FAMI is a buy under $1.
FAMI’s fundamental picture is rebounding, after the COVID-19 lockdowns
FAMI’s financials have weakened in recent years. While the company’s top line has maintained a relatively flat growth trajectory, FAMI posted in 2020 its first top-line decline of the last five years. FAMI’s net sales declined by 1.9% to $302m in 2020, following a decline in demand during the Covid-19 lockdowns.
On the other hand, net income has decreased considerably, down 74% in the last two years to $82m in 2020 and the company reported its first net loss of $31m in 2019.
Nevertheless, the company’s financials are recovering. During the first half of the year, total revenues increased 31% to $17.79m for the six months ended March 31, 2021, compared to $13.58m for the six months ended March 31, 2020. The increased sales volume is mainly attributable to the recovery of economic activities in China since the end of the COVID-19 lockdown in April 2020, which led to increased customer orders.
Additionally, net income for the three months ended March 31, 2021, increased to $1.36 million, versus a net loss of $0.057 million for the three months ended March 31, 2020.
The balance sheet of the company has followed a different path. As of March 31, 2021, FAMI had a cash balance of $16.0m and current liabilities amounted to $7.9m, compared to net debt of $7.27m in 2020, corresponding to a leverage ratio of 3.37x.
The company is diversifying its activities to accelerate growth and the company is undervalued at its current price
On September 29th, FAMI announced that it had finalized a deal to purchase Jiangxi Xiangbo Agriculture and Forestry Development for RMB 70m. This move would allow the company to expand its forest-related business in China. The acquisition has been appreciated by the market, as FAMI’s share price nearly doubled after the announcement.
Management also announced the launch of four new subsidiaries to accelerate the development of FAMI’s new health and wellness business. The company plans to enter the rehabilitation and elderly care management business, which should benefit from the spike in demand associated with China’s aging population.
Also in June 2021, FAMI established a community group purchasing distribution network with two other partners that will seek to maximize potential upside by leveraging each company’s business platform and expertise, while reducing each party’s investment risk.
Given the above metrics, FAMI’s current valuation is cheap, with a P/B ratio of 0.26x, which would represent a discount of 74% compared to its book value.
FAMI’s stock had a rough year and this is not surprising given its declining financials, as well as navigating the pandemic.
Though the company seeks to expand its business with ventures into forestry development, the health & wellness business and establish a community group purchasing and distribution network,
This initiative aims to provide opportunities for revenues and profit growth, if management can deliver on these projects.
While these developments might prove constructive in the long term, the stock is still struggling with bearish momentum, which indicates that risks could prevail in the near term. With its current valuation, FAMI’s risk/reward is compelling and could provide an opportunity for investors looking to long the stock.