Mengniu announced to purchase 100% equity interest of Lion-Dairy & Drinks Pty Ltd, an Australian-based branded dairy and beverage company, from Kirin Foods at an initial consideration of AUD600mn (RMB2.9bn). Overall, we think the acquisition can meet Mengniu’s pursuits in overseas raw milk source and distribution network in Southeast Asian market. The acquisition consideration is undemanding and there are synergies to be explored.
- Low-cost milk supply for Milk Deluxe. Australia farmgate milk price is estimated at RMB2.44/litre (RMB2.37/kg) in FY19/20E, cheaper than China’s current RMB3.83/kg. After investing some modification capex, Mengniu can transfer the production of Milk Deluxe from an OEM in New Zealand (around 800,000 litres) to Lion-Dairy and can gain the OEM margin. Furthermore, Mengniu plans to raise the production volume of Milk Deluxe in Lion-Dairy to more than 200mn litres in future. These are the major synergies of the acquisition.
- Other synergies. We think there are further synergies from (1) sharing of distribution network, infrastructure and back office systems in Australia across Lion Dairy, Bellamy’s and Burra Foods; (2) sharing of R&D, collaboration of sales and marketing and cross-selling across brands and products among the group. Lion-Dairy’s top milk beverage brand “dare” and yogurt brand “Farmers Union” could be introduced into China and Southeast Asian markets. Mengniu can become a regional player with multi-brand portfolio in Asia Pacific.
- Room to improve margins. In FY18, Lion Dairy achieved 6.6% EBITDA margin, less than Mengniu’s 7.8%. However, management targets to lift the EBITDA margin of Lion Dairy to above 10% through synergies and turnaround of white milk business (contributed around 30% of revenue but negative net profit margin).
- Undemanding valuation According to management, Lion Dairy’s revenue was flat over the past 3 to 4 years given that Kirin cannot provide synergies for Lion-Dairy and Australia is a stable market. The consideration represents 13.1x historical P/E and 1x P/B. Management added that the capex required to build a new UHT plant in Australia is at least AUD300mn. Therefore, we think the consideration is undemanding. Based on FY18 results, we estimate the acquisition could enhance Mengniu’s adjusted NP by 5%. The deal, subject to FIRB’s approval, is expected to be completed in 1H of 2020.
- Maintain Buy. Our TP of HK$37.00 is based on 28.0x FY20E P/E, which is the high-end of 18-30x 1-yr forward P/E range since Mengniu resumed double-digit revenue growth in FY16. Catalysts: better-than-expected revenue and margins. Risks: raw milk cost pressure (net profit drops 4% per 1% increase of raw milk price), food safety issues.
