Why the Dairy sector?

Macro

  • Demand for protein forecast to exceed supply for the foreseeable future – even in a recessionary economic environment
  • Increasing wealth in the developing world = westernised diets

Micro

  • Established industry in NZ
  • De-regulating sector in NZ
  • NZ dairy IP now being exported to developing nations

The investment philosophy is one of low risk with reasonable growth opportunities that have as a foundation the existing $15 billion revenue pool of the dairy industry in NZ. We believe that Fonterra is an excellent low risk business for current shareholders / suppliers. However, we also believe that the capital structure is poor and will adjust to better reflect risk and return. This adjustment, along with the enabling provisions within the Dairy Industry Restructuring Act 2001 (DIRA), will create opportunities to add value to the existing revenue pool. Coupled with the commercial likelihood that Fonterra is unlikely to retain its existing dominance, the opportunities may be significant in a New Zealand private equity context.

The dairy sector is:

  • One of the genuinely globally competitive industries in NZ with long established customer relationships.
  • A significant contributor to NZ’s total GDP producing a quarter of NZ’s total export revenue income.
  • A long established low risk sector with a history of co-operative ownership. However, the distribution of all earnings as a milk payment makes it difficult to see where capital is employed and what returns are being generated.
  • Now dominated by Fonterra with competition enabling legislation providing low risk entry points into the industry.
  • A simple industry but one that is characterised by a lack of information and sector analysis.
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