Australian Dairy Farms Group (ASX: AHF) has made a move to capitalise on increasing domestic demand for premium organic foods with the $1.5 million acquisition of Sydney-based Flahey’s Nutritionals, producer of organic infant formula products including the new-to-market Flahey’s Future.
The acquisition marks ADF’s foray into the organic formula market and aligns with its strategy of transitioning from conventional basic producer of low-value products to a “premium differentiated branded business”.
Subject to shareholder approval, the acquisition will be funded via a mix of $400,000 cash and 6,875,000 ADF stapled securities in three tranches based on key milestones.
It will include stock necessary for ongoing trade and Flahey’s Nutritionals’ intellectual property for the rollout of an extensive range of infant formula products, including Flahey’s Future, through major retailers in the pharmacy space such as Chemist Warehouse, Priceline and Soul Pattison.
Flahey’s Future is being marketed as a certified-organic formula containing essential vitamins, minerals, protein, carbohydrates fats and pre-biotic fibre.
Also part of the acquisition agreement will be the retention of Flahey’s Nutritionals principal Chris Flahey as ADF’s new sales and marketing director responsible for the execution and transition to a fully-branded business.
Mr Flahey has considerable experience within the sector, having worked as sales and marketing director of Bellamy’s Australia and playing an instrumental role in that company’s transition to an ASX-listed business.
Entering the organic market
The acquisition of Flahey’s Nutritionals represents the first key step in the implementation of ADF’s strategy to become an important active participant in the organic formula market.
The company plans to eventually move to full production of organic infant formula in its own facility, from organic milk produced on its own organic farms.
ADF currently owns and operates six farms producing 17 million litres of conventional milk per year.
Over the next three years, the farms will be progressively converted to certified organic processes and once complete, ADF will become Australia’s largest single-farm entity for the production of organic milk.
In March, ADF said it plans to draw on external supplies of organic milk so it can achieve targeted volumes ahead of the conversion process.
This week, ADF announced its Camperdown dairy factory in Victoria had commenced the production of organic yoghurts in partnership with New Zealand-based specialist dairy foods company The Collective.
The factory – which is certified to receive organic milk and process it into organic products such as butter, yoghurt and bottled milk – will distribute the yoghurts to Woolworths stores in Victoria, New South Wales and Queensland, with a view to achieving national rollout by year end.
ADF expects the multi-year contract to generate sales to the company of between $30 million and $40 million.
A growing thirst
Organic food refers to the way agricultural products are grown and processed without the use of synthetic pesticides, bioengineered genes (GMOs), and petroleum-based or sewage sludge-based fertilizers.
Organic livestock raised for meat, eggs and the production of dairy goods must have access to the outdoors and be given organic feed without additional antibiotics, growth hormones or animal-by-products.
ADF chief executive officer Peter Skene said the region’s growing thirst for organic dairy products is continuing at rates in excess of that for the conventional white milk market, and the organic infant formula market is following suit.
“The market for infant formula in Australia and New Zealand is expected to double in size over the coming years, from $230m in 2017 to around $546m by 2023,” he said, adding that the China export market may be a viable opportunity in the near future.
“While conventional infant formula sales in China are growing at 9% a year, sales of organic infant formula are growing at 46% a year, [representing a market opportunity].”
At mid-afternoon trade, shares in Australian Dairy Farms were trading 10% higher at $0.165.