[ET Net News Agency, 26 November 2019] China Mengniu Dairy (02319) announced plans to
acquire 100% of Australia's Lion Dairy & Drinks (LDD) business for A$600mn (on a debt and
cash-free basis).
Goldman Sachs said the consideration implies 2018 EV/EBITDA of less than 6x, but it also
noted that Kirin (owns LDD) expects LDD's 2019 earnings to decline on the rising input
costs.
The research house believes some moderate cost savings on the supply side could be
achievable, but leveraging the sales of LDD's multiple brand portfolios could take more
time to realize.
Goldman said the Australian raw milk price is substantially lower than China (RMB2.5
equivalent per liter versus China's RMB4 plus for Mengniu). Hence, if the deal completes,
Mengniu could potentially leverage the cheaper Australian milk source and export more end
products into China as premium milk products.
Mengniu mentioned during a call that Imported Milk Deluxe would be firstly produced in
Australia, instead of New Zealand currently; Goldman estimated this could potentially save
about RMB20mn in costs per annum (given the RMB600mn sales scale and 15% cheaper milk
costs).
It also believes the transaction would open up the opportunity for Mengniu to produce
other high-end products out of Australia (in house sourcing) or procure other ingredients.
Goldman maintained its "neutral" rating on Mengniu, with a target price of HK$31.4. (KL)