Smart Organic: Uplisting and Capital Increase
Visiting Disneyland, Going Down the AI Rabbit Hole, the 3x Increase of the Price of Cocoa, and Smart Organic's Capital Raise
I am back after spending the last 2 months going down the AI rabbit hole and also traveling a bit. I may have more to share about the topic in future posts.
Also, Disney parks are still amazing businesses, although the same cannot be said about the company as it stands now. How did Disney lose its way? Once it was one of the hold-forever Buffett favorites. Now, it is a perpetual turnaround. Was the woke agenda in the movies the first indication? Was the acquisition of 21st Century Fox's assets the last bite on which Disney choked? In any case, if you want to hear the fascinating story of how Disneyland came to be, I highly recommend this episode of Founders podcast.
I managed to work on a couple of investment ideas while I was away, most of which I discarded - either in the too hard or too expensive bin. I have to see what I can salvage that is worth sharing.
Meanwhile, there are a few updates on previous write-ups.
Smart Organic
Smart Organic, Bulgaria's largest producer and distributor of organic products, announced a 9% capital raise while uplisting to the main exchange. Two and a half years ago, the company went public on BEAM, the segment for SME financing, and raised the maximum allowed €3M at the BGN 18.90 offering prince. The new capital raised will go towards adding more production facilities, financing future acquisitions, and towards working capital.
Since the IPO, the company has grown organically and via acquisitions. Here is a side by side comparison of the key metrics at the end of 2021 and 2023
The top line hit the expected 80M, and this is despite the spike of inflation and the stagnating German economy, which is Smart Organic's main market. This year the company is facing another major headwind - the price of cocoa, which went up 3x in the first 4 months of the year, and then retreated to "just" 2x.
The world is facing the largest cocoa supply deficit in more than 60 years and consumers could start to see the effect at the end of this year or early 2025, Joules said. The International Cocoa Organization has forecast a supply deficit of 374,000 tons for the 2023-24 season, a 405% increase from a deficit of 74,000 tons in the previous season.
"The worst is still yet to come," Joules said. Cocoa prices will likely remain elevated for some time because there are no easy fixes to the systemic issues facing the market, he said.
- CNBC on 2024-03-26
West Africa, which produces around 70% of the world's cocoa, has experienced unseasonal heavy rains followed by dry heat, leading to poor harvests. Moreover, cocoa crops in key producing countries like Ghana and Ivory Coast, together representing 60% of global cocoa production, have been devastated by diseases such as black pod disease and the swollen shoot virus.
CEO, Yani Dragov, says that so far they are staying on top of the situation - partly by passing the increases on to the consumers and partly by relying on inventories and the lag in shipments. This leaves open the question of what happens if this spike in cocoa gets protracted. Cocoa trading experts see the price coming down in 2025-26 as crops recover and some companies switch to cheaper alternatives.
Back to Smart Organic's results. Earnings nearly doubled over the 2021-23 period. The company has been investing accordingly. In 2022, Smart Organic opened the new 5000 sq.m. facility in Kniazhevo, including warehousing, manufacturing, R&D lab, and administrative areas, and powered by a 300 KW peak-capacity solar park. In 2023, the company has been busy with the new 6000 sq.m. base in Bozhurishte, which will be officially opened in July-August. It was initially planned for April, but there still some bureaucratic hoops to go through.
The CEO says that the company now was capacity to manufacture BGN 300M worth of product annually.
The latest guidance for Q1 2024 is for 21.4% growth, which is on the lower end of the 20-30% annual growth in the coming years. Earlier this year, Smart Organic guided 25% growth for 2024, followed by 30% in 2024-26.
Overall, Smart Organic is developing nicely. Management seems to have set on the right course and execution is admirable so far. If they deliver on the 20-30% growth promise over the next 5 years, the company will be worth considerably more. The current cap is $120M on $7M 2023 earnings, which could grow to $17-25M by 2028.
The full write-up from this February is linked below.