Wentworth Securities trading note. Not Research.
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24 - 06 - 2015
This communication has been prepared by the at Sales and Trading team within Wentworth Securities. It is not a research report and is not intended as such. See full disclaimer below.
Australian Dairy – Where the Billionaires are investing.

Money, mostly from significantly resourced investors, is piling into Australian Dairy.
  • A2 Milk (A2M.ASX) – American dairy giant, Dean Foods, has emerged as the mystery bidder. Freedom Foods (FNP.ASX), backed by the Perich family, owns 19.2% and is also rumoured to have made a bid
  • Gerry Harvey - $80m into Coomboona Holsteins operation in Victoria.
  • Gina Rinehart - adding to her investment in the Mary Valley (QLD), buying ~ 5000 hectares of dairy farms. She joined forces with Chinese industrial giant China National Machinery Industry Corporation in a $500 million joint venture to export infant milk powder.
  • Moxey Farms – Moxey and Perich Families formed a partnership with Freedom Foods and a Chinese private company, New Hope Dairy Holdings, looking to bring together assets and operations across the supply chain in NSW. Moxey Farms runs 3,700 milking cows on 2,700 hectares producing 50m litres of milk annually. (read more on Moxey agreement)
  • Camperdown Dairy – MCG Group & Eat Group recently purchased Camperdown Cheese and Butter Factory along with local farms to create a fully integrated export model. It will need about $120m for the plant alone. (more here)
  • Murray Goulburn – listing on the ASX with large production expansion plans as part of the use of funds.
Liking the thematic, we recently put a toe in the water by participating in the placement of Australian Dairy Farmers (AHF.ASX) at 20c. The placement (terms here) was to acquire a number of synergistic farms and take milk production to >20m litres and double NPAT. They want to reach 50mL within the next 2 yrs. As volume grows, they gain a premium price, as there is competition to secure larger individual supply sources.

The farms are all in the “Golden Triangle” of South West Victoria. Named for the conditions, which generally, see ideal dairy production. AHF Presentation is worth a look.

If AHF executes the aggregation strategy successfully, they would fit neatly into a vertically integrated farmgate – production – export model, which the Billionaires above are pursuing. So it may make the target list of one or more of those groups in time. 

With the FTA agreement with China, dairy tariffs get phased out relatively quickly, completed by 2025. And why is infant formula so important? The 15 per cent tariff on infant milk formula gets phased out over four years. (FTA winners here).

AHF management were impressive.  Managing risks, and controlling what they can control, was well addressed. However, it is a very much an investment where you need to take time to understand the business model and risks. Certainly the offer is not for everyone, and many have been exposed to many failed agriculture investments, for various reasons, in the past decade or so, on the ASX. Having said that, AHF has enjoyed strong institutional support, particularly out of Asia, since listing. I do, however, think this starting point is different and worth investigating. The reasons, apart from management, I like it are as follows: -
  • Dairy property prices have still not recovered from lows.
  • Large opportunity to aggregate fragmented individual farms. Lack of succession planning for family owned farms.
  • Major increase in production capacity planned by the majors (Murray Goulburn etc.)
  • FTA agreement making imports more competitive.
  • Premium pricing as volumes increase.
I am happy to discuss at any time. There is broker research available that we can share on request.

The Wentworth Securities Team

Clint Abraham

Head of Trading and Portfolio Management
d: +612 9119 6033

Thomas Schoenmaker
d: +612 9119 6036

The Wentworth Corporate Finance Team

Scott Griffin
Head of Corporate Finance
d: +612 9119 6037

Ian Gebbie
Director - Corporate Finance
d: +612 9119 6034
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