FAMI share: aggressive expansion will not end well for shareholders

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Closed (NASDAQ:FAMI) is a small Chinese agricultural commodities company and a genuine penny stock, whose shares are currently trading at around 35 cents. FAMI stock slumped below a dollar in April on a large secondary offering, and it has not gone above 60 cents since that point.

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There was another big rally in September, but the company quickly torpedoed that rally with another gargantuan secondary stock offering.

So what is Farmmi, and why does she feel the need to keep raising so much capital?

A listed mushroom producer

Farmmi traditionally operates in the mushroom industry. Specifically, she sells shiitake mushrooms and other types of edible mushrooms and dried mushroom products. Farmmi sells in the Chinese domestic market and also has agreements to export its products to overseas markets.

The company’s revenue has been stable at around $ 30 million per year for the past four years. However, profitability has fallen sharply. Earnings per share fell from around 30 cents a year a few years ago to around breakeven more recently.

Considering the small size of the company, lack of growth and low profitability, Farmmi decided to diversify.

Farmmi buys a forest

In September, Farmmi announced the takeover of Jiangxi Xiangbo Agriculture and Forestry Development for 70 million Chinese renminbi (approximately $ 11 million).

Jiangxi Xiangbo produces Moso bamboo, Camellia oleifera and Chinese firs. Farmmi explains that Moso bamboo is used to make aquatic bamboo shoots, which is an edible food product. Camellia oleifera is used to make an oil similar to olive oil. It is also used as a moisturizer in beauty products. Fir trees, on the other hand, are popular for making plywood and other lumber products.

It seems like a logical acquisition for a farm products business. For example, edible bamboo shoots appear to be a good complement to the company’s existing mushroom business. On its own, Farmmi’s purchase of forests could be a winner.

Overwhelming dilution

If Farmmi could find the money for these plans on decent terms, it might all make sense. However, Farmmi funded its expansion efforts with prohibitive cash flow.

In April, Farmmi sold 140 million FAMI shares to the public at 30 cents each, raising $ 42 million. It was a painful decision for existing shareholders. Prior to this stock offering, the FAMI stock was trading at around $ 1 per share. So in essence, the company has indicated that it is so strapped for cash that it is willing to print shares at a 70% reduction at fair value to raise only $ 42 million. This is a disastrous result for the shareholders.

It’s getting worse. By September, FAMI stock had finally regained some upside momentum, with stocks once again approaching 60 cents for the first time in months. Then the company announced another stock offering. In it, Farmmi issued even more shares – over 368 million shares at a pathetic 22 cents each. Once again, Farmmi handed over much of the business at a gargantuan discount from what its stock owners thought it was worth.

Such an offer of shares may be excusable, but pulling the carpet like that twice in six months is just too much. No one can trust Farmmi to responsibly allocate their capital after seeing this model emerge.

Verdict Stock FAMI

We understand why management took the measures it took. The main activity of the company in the field of mushrooms has not performed well in recent years. So it makes perfect sense that the company wants to shake things up and take a new direction.

However, this massive dilution is a crippling blow to existing shareholders. And there’s no guarantee the management team won’t do it again the next time stocks rally. After all, if they were willing to launch 368 million shares now at such a jarring discount, what would prevent further dilution in the future? This allows management to add more assets to their empire, and if outside shareholders get lower returns, so be it.

The poor quality of governance in Chinese companies has become a burning issue in 2021. It is far from clear how things will turn out for titans such as Ali Baba (NYSE:BABA) Where Tencent (OTCMKTS:TCEHY) for the moment. In the meantime, however, it’s generally best to avoid small Chinese companies like Farmmi during such a volatile macroeconomic time. Especially when they seem addicted to issuing new shares in difficult market conditions.

As of the publication date, Ian Bezek does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Ian Bezek has written over 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a $ 300 million New York-based hedge fund. You can reach him on Twitter at @irbezek.


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