Huntley on NFD National Foods (NFD)
In a triumph for MD Max Ould and his management team NFD has won a national contract to supply house brand milk to Woolworths. Previously NFD supplied house brand milk to Woolworths in NSW, WA, TAS and NT but the new two-year contract, which becomes effective in September, adds QLD, SA and VIC. The contract is worth $150m pa and will see Woolworths paying NFD an extra five cents per litre, some of which will be passed on to farmers. Housebrand retail milk prices at Woolworths will rise by 4% over the two years.
This deal vindicates NFD's capital expenditure and other efforts in recent years to become the most efficient milk processor and the only processor able to offer a national package to Woolworths. With the program of capital expenditure largely complete NFD generates abundant free cashflow, which the company has said it will use to increase the dividend. The new cashflows from the national Woolworths contract will enhance NFD's ability to increase DPS and we will be upgrading our earnings forecasts. Despite the runup in the shares the stock is still trading on a FY03 yield of 5.0% fully franked and we advise our income-oriented investors to Buy. Buy for yield.
What implications will the deal have for dairy industry consolidation? The loser from the deal is co-op Dairy Farmers, which will lose volumes in its VIC and SA operations. Already struggling after causing a price war in the last tender two years ago, Dairy Farmers' financial position and bargaining power are now even weaker. If industry rationalisation starts, Dairy Farmers might be forced to merge with NFD on less favourable terms than NFD offered during talks in December 2000. It retains its strategic stake in NFD however, as do Danone and Fonterra. We continue to think the number of processors must decrease and comment that NFD's Woolworths deal now increases its bargaining power with the multitude of players which have an interest in the Australian dairy game. Growth-oriented investors also Buy.
- Forums
- ASX - By Stock
- 500 Million Dollar Contract
Huntley on NFD National Foods (NFD) In a triumph for MD Max Ould...
Featured News
Featured News
The Watchlist
CCO
THE CALMER CO INTERNATIONAL LIMITED
Anthony Noble, MD & CEO
Anthony Noble
MD & CEO
Previous Video
Next Video
SPONSORED BY The Market Online