Freedom Foods still sees value in dairy formula and China

The specialist beverage, cereal and snack food processor is buying into the sports and adult nutritional formula business.

It has also teamed up with a Chinese company in Shenzhen Province planning establish a spin-off venture to sell its Australia’s Own brand products, including infant nutrition lines, in China.

Another Freedom joint venture, Australian Fresh Milk Holdings, owns the nation’s biggest single-site dairy, Moxey Farms in Central West NSW, from where milk will  be sourced for the new Shenzhen business products.

The new acquisitions are being funded by a $75 million equity raising which kicked off last week when the first-stage institutional placement of shares at $4.45 each was over-subscribed.

The capital raising will also fund a $50 million takeover of the big northern Victorian “long life” milk packaging business, Pactum Dairy Group, at Shepparton.

Freedom, already a half owner, started Pactum in 2014 with local dairy farming business Australian Consolidated Milk, which will remain a long-term supplier as the plant expands into protein powder ingredients, drinking yoghurt and cream.

Freedom Foods Group already has numerous brands and products in its stable, including tinned seafood, almond and rice milk, gluten-free breakfast cereals and organic snack bars.

It sees its Australia’s Own dairy lines and its Freedom cereal and milling products at the forefront of long-term sales and earnings growth in Australia and Asia.

Sydney-based Freedom is also breaking into the North American market.

It is in the throes of buying a controlling stake in a natural breakfast food company which supplies 11,500 specialty and natural food retailers in the US and Canada.

Managing director, Rory MacLeod, said full details of Freedom’s first production foray into North America would be spelt out when the transaction was finalised on February 17, the same day a $20m purchase of an Australian sports nutrition formula maker will be wrapped up.

He said Australian exports of the company’s wheat-free and allergen-free snack and cereal products to North America would eventually be supported by an expanded range produced at the overseas plant.

Meanwhile, Freedom’s new sports nutrition product business acquisition was expected to expand its offering in Australia, China and South East Asia to include beverages and snacks.

Its expansion into more nutritional product exports comes despite other high-flying players in the market, Bellamy’s Australia and the Blackmores-Bega partnership lately reporting tougher than expected sales conditions in China.

Tasmanian-based Bellamy’s has also lost nutrition formula sales in Australia where about half its turnover in the past year has been attributed to entrepreneurial shoppers on-selling to family and friends in China and Vietnam.

Mr MacLeod said while much of the Australian food and beverage industry had significantly underinvested in the past 20 years, Freedom was developing a unique supply and manufacturing footprint in its key categories.

The planned partnership with China’s Shenzhen JiaLiLe Food Company –  Australia’s Own Dairy Company China –  would initially involve a 10 per cent investment worth about $4.3m with an option to take up to 30pc of the business by 2019.

The AO China business would potentially see an international stock market listing “in the medium term”.

The new company would source processed products from Australia, including specialty Kid’s Milk launched by Australia’s Own last year in China and now a category leader.

“With a forecast significant increase in Kid’s Milk demand we will install additional high speed 200 millilitre packaging capacity at Freedom’s new Ingleburn (Sydney) site in 2017,” Mr MacLeod said.

Freedom’s retail entitlement offer opened this week offering eligible shareholders two new shares for every 25 they held on December 9.

Just over half the entitlement offer shares, worth about $35m are expected to be bought at $4.45 each by Freedom’s cornerstone investor Arrovest.

Arrovest is owned by co-partner with Freedom in the Australian Fresh Milk Holdings production business, the Perich family, which also owns Leppington Pastoral Company’s big dairy and grain farming business.

However, while Freedom has enjoyed an impressive 1300pc share price lift in the past five years, some market observers are uneasy it has already relied heavily on $125m from capital raisings in the same period to pay for its expansion push.

Gross profit margins from the expanded business slipped from 36.2pc in 2014-15 to 29.7pc in 2015-16.

It reported an operating profit of $10.8m last financial year.