Wentworth Securities - This communication is not a research report and not intended as such. Please see disclaimer below. 29/12/2015 View this email in browser

AHF.ASX becomes first vertically integrated ASX listed dairy company by acquiring Camperdown Dairy Co. +100%

I wrote a note on the Dairy sector which included Australian Dairy Farms (AHF.ASX) and Camperdown Dairy (CDC), back in June (see note).

Since then AHF has under-performed, until today. Mention China and Dairy and the stock has turned over 27m shares and up 100%! However, AHF owns 6 dairy operations in Victoria, and by acquiring CDC, an established dairy processor, which also is one of the few with certification for rapid clearance of milk into China (CIQ). In short, debt funded and "potential" to double EBITDA in FY 2017.

Announcement Highlights

See announcement here.

• Binding agreement to buy Camperdown Dairy Company from Aussie Farmers Direct.
• Acquisition creates ASX’s first vertically integrated dairy producing and processing and exporting company.
• Consideration of $11m to be funded by AHF cash reserves and bank facilities.
• Camperdown Dairy Company (CDC) is an established dairy processing business
located in South West Victoria, Australia near AHF’s existing dairy farms.
• The growing customer base includes processing premium milk products for
Woolworths and Aussie Farmers Direct.
• CDC is one of the few Australian dairy companies with certification for rapid
clearance of fresh milk into China – 7 days from farm-gate to retailer in China.
• CDC management team has more than 100 years combined dairy industry experience and will continue to manage CDC post acquisition.
• Acquisition expected to be completed by the end of January 2016.

Based on AHF’s assessment of the vendor’s financial forecasts, this acquisition has the potential to more than double AHF’s anticipated EBITDA in the 2017 financial year.

AHF - 12 Month price chart

Bellamy's (BAL.ASX) - star performance over 12 months

Bellamy's or AHF?

Bellamy's has been one of the best performing stocks on the ASX. And driven, in part, by the milk solids (MS - baby powder) product sales into China, amongst its other products. Now there is no suggestion of AHF is now producing MS via the acquisition, so any comparison is not valid, and I am not suggesting it is the next Bellamy's. However, the point of looking at the multiples is to look at the premium the market is paying for companies getting the China/Dairy story right, with real dairy businesses that can access the mainland China market. 

Using Morgans research (30/11/2015) on Bellamy's, they are trading on EV/EBITDA (x) FY16 31.1x's and FY17 16.9x's at at price of $13.90 (currently $14.90). On a normalised PE that is 59.6x's FY16 and 32.3x's FY17. 

Using Bell Potters research on AHF (13/10/2015), not including any accretion from the deal announced today, AHF at 25cps is trading with an FY16PE of 33x's and FY17 of 15.7x's. (current price is 29c)

It will be interesting to see the press over coming days, and any research. Its a very interesting space, with more potential given, the size of the opportunity to export into ASIA.

Note - I own shares in AHF.ASX along with Wentworth Securities clients. 

Kind regards

The Wentworth Securities Team

Malcolm Nutt
d: +612 9119 6035

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