The market is Moo-ving


Today I want to talk about a dairy company. This isn’t the first time we have discussed dairy here, in fact there is a host of information about the sector and key players in the market available on Blue Lake Invest. But today’s company is a little different. While ASX:BAL and ASX:A2m are considered ‘dairy processors’, ASX:AHF (Australian Dairy Farms Group) entered the market as a dairy farm.

Meaning the core business was producing fresh milk.

This had left AHF highly exposed to the world dairy price, which has been suffering from an oversupply in the market. This may be hard to comprehend given the huge demand and euphoria surrounding the milk powder market. But an acquisition towards the close of 2015 meant AHF had diversified and added a significant alternate income stream.

Camperdown Dairy Company was this acquisition. This gave AHF access to an already profitable business that produced milk, butter, cream and yoghurt (the only ASX listed company to boast this line up). The company sells into big brands including Woolworths and Aussie Farmers Direct. However the strategic importance of this acquisition is the proximity to AHF’s other dairy farms in South West Victoria.

The rationale is quite simple, the milk that they produce can now be processed in their own dairy processing facility. A vertically integrated strategy that mitigates risk and presents strong growth opportunities.

Yesterday the group released the investor report, presumably signalling upcoming sales pitches to the big end of town. It is this report that highlights the below growth opportunities.

  1. First one I will call out is the obvious Chinese market. In conjunction with the TPP and Chafta which will eventually eliminate tariffs on dairy, AFH via Camperdown Dairy Company is one of two companies that qualify for ‘rapid clearance’ on fresh milk. The growing middle class will begin to demand fresh milk, and existing access to the market will present a strong value proposition.
  2. The second is the opportunities to expand and roll out new products into supermarkets. Leveraging the existing relationship with Woolworths, and developing their own branded products AHF will target more sales through this channel. Independent supermarkets are in their sights, and once brand recognition is achieved you would anticipate that other supermarkets (read Coles) will come knocking.
  3. Like any sizable business adding assets is done with the intention of streamlining operations and achieving efficiencies. What makes AHF even more powerful in this sense is a vertically integrated strategy. There is an opportunity to expand capacity, reduce cost and negotiate greater margins for their produce.

From an investor standpoint I draw parallels with the other dairy companies listed on the market. There is no doubt excitement and anticipation which has pushed the price above its perhaps true market value. What makes it interesting at the current price is that it’s sitting 32% off a high recorded just over a month ago.

That is not based on any bad news, just investors cashing out profits driven from the Camperdown Dairy Company acquisition.

That highlights the potential of this stock should good news come in. The other great potential of this stock is of course the potential for takeover. It currently trades at a market capitalisation of $87m, but is the only ASX listed company that produces the full suite of dairy products, and offers a strong vertical integration strategy.

The appetite for Asian investors to take over Australian agricultural assets will at the very least inflate the stock, regardless of whether a takeover is approved. If you liked this article, or just want more like it then I encourage you to join other readers and subscribe below.