Introduction

 

Happy Valley Nutrition Limited (ASX: HVM) was incorporated in New Zealand on 8 April 2016 to develop a vertically integrated nutritional grade milk processing blending and packaging plant for Infant Milk Formula (IMF) and other nutritional products. Their vision is to become a trusted business-to-business (B2B) supplier of IMF and other nutritional products, which primarily utilise A2 and organic milk. The other nutritional products include IMF base powders, IMF ingredients and Liquid variants that align with market demands (Other Nutritional Products).

There has been an increase in dairy demand over the past 6 years due to strong growth in key markets such as Greater China and South East Asia where dairy volumes increased by 4.7% and 10.5% respectively. The significant uplift in demand in developing countries is largely due to rising populations and per capita income growth. As developing countries become more affluent there is an increased focus on nutrition leading to increases in demand of ‘Western’ food and supplements. Dairy provides satisfactory nutritional, organoleptic, and functional benefits.

The Company’s site is strategically located in the Waikato region, a large catchment area of A2, organic, and pasture fed milk herds in New Zealand. According to New Zealand Dairy Statistics in 2017/18, 72% of all New Zealand dairy herds are located in the North Island, with 33% situated in the Waikato region.  Of the milk produced in New Zealand in the 2017/18 season, the Waikato region produced 22% of all milk solids, valued at $NZ3.29 billion.

Key Investment Highlights

Offer Overview

Happy Valley Nutrition Limited is looking to undertake an IPO on ASX to raise a minimum of $12 million and up to $15 million via the issue of a minimum of 60 million up to 75 million shares at an offer price of $0.20.  The Company will have an indicative market capitalisation of $42 million (Minimum Subscription) and $45 million at the Full Oversubscription. The Company proposes to use the funds raised from the Offer to:

• Prepare the site
• Finalise basis of design and construction planning
• Fund capability building, advantage strategic partner arrangements and overheads
• Cover the cost of land
• Provide working capital
• Cover costs of the Offer

Industry Overview

Happy Valley Nutrition Limited intends to operate in the global dairy industry, specifically within consumer ready infant milk formula, ingredients and formulaic nutritional milk segments.

The global dairy market has been witnessing significant growth within the infant milk formula category. It is estimated that approximately two thirds of infant food is coming from infant milk formula. This growth is largely being driven from developing countries due to various socio-demographic factors as well as higher rates of female participation in the workforce within developed countries. The global baby food and infant formula market was estimated to be worth approximately USD$52.9 billion (AUD$$79 billion) in 2018 and is expected to increase to USD$74.4 billion (AUD$110 billion) by 2024, representing a CAGR of 7%.

New Zealand is the world’s largest exporter of dairy products, yet only the 7th largest milk producer worldwide. The figure below outlines the top 10 export destinations for New Zealand milk equivalents. Export revenue generated from dairy imports to China in the 12 months to March 2019 was approximately $NZ5.4 billion.

According to the Ministry of Primary Industries, in New Zealand, the volume of IMF produced between 2010 and 2019 increased by approximately 588%. This was the largest increase out of any dairy product during this period. This trend is expected to continue with IMF production forecasted to increase by approximately 127% between 2019 and 2024, the highest uplift out of all dairy categories.

Chinese Infant Milk Formula market

With imports of dairy equivalents to China increasing by 74% between 2013/14 to 2017/18 China is the largest importer in the dairy market. In 2018, China imported 14.6 thousand tonnes of milk equivalents, representing 19% of the world’s imports. Chinese demand for dairy is anticipated to continue on this growth trajectory for various reasons, namely due to the continual rise of living standards, the ending of the one-child policy and the fact that in 2016 the Chinese Nutrition Society increased the recommended daily consumption of dairy products. China’s liquid milk per capita consumption in 2016 was 17.8kgs compared with 30.8kgs for Japan and 71.6kgs for the U.S. Consumption of milk per capita in China could converge with Western countries, resulting in a large opportunity for dairy producers. This growth is also due to the significant increase in demand for differentiated high-end IMF. The retail sales value of China’s IMF market is estimated to be worth approximately $26.7 billion. This is forecasted to increase to $32.3 billion by 2023, representing a CAGR of 5%. Product quality, safety and novel ingredients are critical to the Chinese market, resulting in a significant increase in imports from New Zealand.

The Facility

The Facility is proposed to be constructed at 5 Redland Road, Otorohanga, which was acquired from a local dairy farmer and businessman. The site is located near the centre of the North Island of New Zealand, a large A2 and organic milk producing region. The site is located approximately 180 kilometres south of the Port of Auckland.

Happy Valley Nutrition Limited has successfully obtained Resource Consents from the ODC and WRC which include land use, air discharge, stormwater discharge and water take to develop the proposed Facility and is currently working towards the Pre-Project Activities.  The Company’s vision is to become a trusted B2B supplier of IMF and Other Nutritional Products, which primarily utilise A2 and organic milk. The image below shows the vertically integrated nutritional grade plant.

Key Milestones

The Company has successfully achieved the following milestones:

2016

• Incorporated on 8 April 2016
• Acquired the site for the proposed Facility located in Otorohanga, in the Waikato region
• In collaboration with a leading firm of engineering consultants and a global dairy plant manufacturer completed conceptual site designs of the proposed facility
• Application for ODC land use Resource Consents submitted

2017-2018

• Public hearing held

• Secured land use Resource Consent from the ODC to build the Facility on the acquired site
• Application for WRC Resource Consents for air discharge, storm water discharge, wastewater discharge and water supply
• Secured three out of four WRC Resource Consents

2019

• Secured the final WRC Resource Consent which pertained to water supply
• Entered into a conditional sale and purchase agreement for a neighbouring property for the purpose of wastewater irrigation.
• Identified and engaged with a network of dairy farmers that produce A2 and organic milk who are located within a 150 kilometre radius catchment area
• Conducted a detailed geo-technical investigation across the site where the proposed Facility will be built. A factual geotechnical site report was also produced for the Company to inform the detailed structural design of the proposed Facility
• Appointed a General Manager with extensive milk production industry experience and expertise
• Gained Resource Consent for the use of bores on the Company’s owned land
• Engaged with potential strategic partners globally that have branded products

Growth Strategy

The Company’s growth strategy can be classified under four pillars:

1.  Partners / Customers and Products

The Company is pursuing a B2B strategy and has been in discussions with potential strategic partners and customers, for both IMF and Other nutritional Products.

2.  Milk Pool

The Company is situated in one of the largest milk supplying regions in New Zealand.

3.  Construction

The proposed Facility for IMF is anticipated to be an 8 tonne (WMP equivalent) per hour spray dryer and a dryblending and packaging plant for consumer ready product. The current ODC land use consent approval is for two 8 tonne (WMP equivalent) per hour spray dryers.

4.  Quality

Quality and regulatory requirements are fundamental to the Company’s ability to export products.

Key Board and Management

Mr Ivan Hammerschlag - Non-Executive Chairman

With 40 years of business and finance experience as a retail specialist, Mr Hammerschlag was also the Founder and Chairman of ASX listed RCG Corporation Limited (now called Accent Group Limited).  During the period of Mr Hammerschlag's tenure, the market capitalisation of Accent Group Limited went from $12 million to $800 million

Mr David McCann - Non-Executive Director

Mr McCann is a founding shareholder and has 25 years’ experience in managing and operating businesses and has served on both public and private company boards. From 2016 Mr McCann has been a Director of AOP Capital Limited an asset manager licensed by the Hong Kong Securities Futures Commission.  Mr McCann has several years’ experience building infant milk formula brand ‘A+Puro’ from the ground up with operations in New Zealand, Hong Kong and China.

Mr Randolph van der Burgh -Non-Executive Director

Mr van der Burgh is a founding shareholder and is also a founding shareholder in VCFO Group and Rockburgh Fund Services and is both an investor in a range of businesses and an international tax, corporate finance and strategy adviser to a range of clients in the New Zealand private equity, venture capital, funds management, real estate, agriculture and dairy sectors.  Mr van der Burgh has several years’ experience building an IMF brand “A+ Puro” from the ground up with operations in New Zealand, Hong Kong and China. Mr van der Burgh has a strong network of contacts in the dairy industry in New Zealand and a deep understanding of the opportunities that exist outside New Zealand.

Mr Anthony Kahn - Independent Non-Executive Director

Mr Kahn has been involved in finance and business for over 30 years. Previously Anthony worked for Macquarie Bank Group for 18 years, including as an executive director for 10 years. Mr Kahn was head of the Infrastructure Funds group for 6 years where equity under management grew from $500 million to $12 billion during that period.

Risks

You are encouraged to read the Prospectus carefully as it contains detailed information about the Company and the Offer. Like all investments, an investment in Happy Valley Nutrition Limited carries risk. As set out in Section 5 of the prospectus, Happy Valley Nutrition Limited is subject to a range of risks, including but not limited to dependence on strategic partners, capital cost to construct the facility, dependence on milk supply, laws and regulations and the company obtaining additional funding to meet its growth plans.

 

Section 734(6) disclosure: The issuer of the securities is Happy Valley Nutrition Limited ARBN 636 597 101. The securities to be issued are ordinary shares. The disclosure document for the offer can be obtained by clicking on the link above. The offers of the securities are made in, or accompanied by, a copy of the disclosure document. Investors should consider the disclosure document in deciding whether to acquire the securities. Anyone who wants to acquire the securities will need to complete the application form that will be in or will accompany the disclosure document (which can be done via the electronic application form which will become available by clicking the bid button above).​

OnMarket has a limited allocation. The offer may close early and the 'Pay By' dates may change. Bids over $10,000 may be scaled back more heavily. Duplicate bids under the same investment profile, investor name or residential address may be cancelled.