Macquarie has $2.70 valuation & price target

MG Unit Trust
Well positioned
MGC AU Outperform
Price (at 05:23, 26 Oct 2015 GMT) A$2.26
Valuation A$ 2.70
- DCF (WACC 8.3%, beta 0.9, ERP 5.0%, RFR 3.8%, TGR 2.0%)
12-month target A$ 2.70
12-month TSR % +26.5
Volatility Index High
GICS sector Food, Beverage & Tobacco
Market cap A$m 473
30-day avg turnover A$m 1.9
Number shares on issue m 209.1

Event

• AGM. No material new news.

Impact

• MGC maintained its $6.05/kgMS forecast for FY16E supported by recent

strengthening in dairy commodity prices but also on the assumption that this
strength continues. Commodity prices are up 60% from August lows, driven
by emerging supply response to low prices. MGC is also benefiting from more
favourable FX than forecast in PDS ($0.76 average) and this is combined with
initiatives MGC is taking to mitigate impact of lower commodity prices from
earlier in the year (e.g. optimisation into higher-value Dairy Foods).

• Our average per-MT WMP prices for 1H/2H16 are US$2,000/2,500 relative to

avg GDT of US$2,694/MT. Our SMP per-MT assumption is US$1,650/2,100
compared to average GDT of US$2,178/MT. Spot prices remain ahead of
our 2H assumptions. EU pricing of fat products has been strong, with Butter
up 6.7% in USD terms and Cheese up 3.1% since the beginning of Sep.

• Back at the Aug result, MCG presented an alternate scenario that if a material

strengthening in commodity prices does not occur and other assumptions re
FX do not eventuate, MGC’s available Southern Milk region FMP in FY16 is
likely to be $5.60-5.90/kgMS or $66-79m NPAT based on application of the
profit sharing matrix. This would result in dividends / distributions to
shareholders and unitholders in FY16 of between 11.9cps and 14.4cps per
unit based on a 100% payout ratio. We forecast a FY16 FMP of $5.87/kgMS
(actual basis) and NPAT of $80.0m.

• Potential El Nino impacts? We have assumed a 2.4% increase in milk

intake in Australia for FY16, and the latest Dairy Australia data shows Aust
milk production up 5.4% in Jul and 3.7% in Aug, so the market so far is
running ahead of our assumption, hence a buffer exists if production drops
due to weather. Strong milk prices over the last two years mean that industry
is well-placed to manage a dry period along with herd management.

• If milk intake volumes were slightly lower, MG would reduce production

of the lowest-value products, hence no significant impact on the business.
Total revenue pool would shrink slightly, and there could be some slight
operating deleverage on cost, but offset by a potential slight mix accretion
which may give a matrix allocation benefit (i.e. more available per kgMS of
milk processed). Net-net, we think it’s unlikely to have a material impact on
earnings. Recent Dairy Australia data suggests a shift towards production of
higher-value products such as Cheese. Cheese production was up 12% in the
quarter to Jun 2015.
Earnings and target price revision

• No change.

As always DYOR