From Bell Potter Research morning Ingredient prices run Since...

• From Bell Potter Research morning
• Ingredient prices run
  Since reaching its August low, the GDT index has rallied 63%, with individual product streams up 60-80%. The recovery in the GDT mix has also been matched with a strong upward move in dairy futures markets in NZ, with the YTD average and forward curve prices implying YOY gains of +27% in WMP, +11% in SMP and +26% in Butter in AUD terms. Production cuts in NZ (FY16e production to be down more than 5%) have been the major driver of the turnaround in dairy prices and if sustained now suggest FY16e target FMP payment ranges of $5.80-6.20/KgMS are significantly more achievable. MCG is highly leveraged to a rising FMP (which is inherently linked to international commodity prices) and we retain our Buy rating with an upwardly revised target price of $2.68ps.
• From then to now
  The recent surge in global dairy ingredient prices coupled with the deterioration in the Australian dollar are material tailwinds for the earning prospects of MGC. Implied FY16e AUD dairy ingredient prices for WMP, SMP & butter are now well ahead of levels seen at the time of the MGC IPO. Following a review of our pricing assumptions for the commodity streams of MGC we have upgraded NPAT forecasts by +13% in FY16e, +10% in FY17e and +10% in FY18e. As a result of these changes we also upgrade our target price to $2.68ps (prev. $2.35ps).
• Investment view: retain Buy rating
  MGC is highly leveraged to rising dairy ingredient prices via the profit sharing mechanism which links returns to the FMP. In a rising FMP environment this profit sharing mechanism sees an increasing share of the milk pool allocated to unit holders, between a FMP band of $5.00-7.00/KgMS, meaning that MCG carries greater upside leverage to rising milk prices than other listed exposures. A more favourable commodity pricing environment and gaining exposure to the benefits of MGC’s capital investment program support our Buy rating.