National Milk Records plc (NMRP) – “Big Data for Dairy”
It’s not often I stumble across a company that I have:
1) never heard of before, and
2) find myself wholly compelled to find out more about them.
Well, so was the case when I attended the recent Mello Derby event back in April of this year and observed a company on the schedule called “National Milk Records plc”.
With a number of differing companies vying for investor’s attention in a packed 2-day schedule, my contrarian curiosity got the better of me and was I shortly pleased to be listening to a comprehensive presentation by National Milk Records (NMR) MD Mr. Andy Warne.
Andy has been with the company since 2002 and articulated to the audience that NMR had been in existence since 1944 although was only listed in 1993, had recently undergone a significant change and was now poised for growth.
Ok, but what do National Milk Records do exactly?
The NMR Group comprises the following 5 businesses / operating sectors:
- National Milk Records (NMR)
- National Milk Laboratories (NML)
- Independent Milk Laboratories (iML)
- Nordic Star
Taking these in order:
National Milk Records (NMR) is the leading supplier of milk recording services in the UK, providing management information on individual cow’s performance in terms of milk quality, yield and fertility. It is acknowledged by the industry that NMR is the market leader in the provision and support of dairy software in Great Britain.
NMR also supplies aggregate data to over 35 dairy industry bodies including milk buyers, Dairy Companies and breed societies as well as forming the basis for food providence schemes for retailers such as Tesco, Sainsbury and Marks and Spencer.
The farmer is the NMR customer and their recording services reach the cows which produce at least 50% of the UK’s milk.
In the accounts to year ending June 2017 “Farm services including milk recording” provides circa 70% of Group turnover.
National Milk Laboratories (NML) provides a range of disease and microbiology testing services, including the Cattle Health Certification Scheme (CHeCS) accredited ‘Herdwise’ programme for Johnes control. NML also provides a range of ‘Reverse transcription polymerase chain reaction’ (otherwise know an ‘rtPCR’) testing services for the identification of DNA associated with specific mastitis causing bacteria to assist with effective mastitis control. These samples then being sent to NML who in total receive samples from circa 98% of UK dairy farms for testing of fats, proteins and cleanliness; this data informing payment to the farmer.
NML works in partnership with NMR to also inform farmers on the health of UK dairy herds as well a running national, statutory testing programmes for diseases such as Johne’s on behalf of the Department for Environment, Food and Rural Affairs (DEFRA) and the Food Standards Agency (FSA).
NML currently tests 10 million samples of milk annually.
Independent Milk Laboratories (iML) is a 50/50 Joint Venture between NMR and Progressive Genetics who are based in Ireland. iML was established in 2010 to meet the need for a high quality, independent and accredited milk testing laboratory in Ireland and offers payment testing services, disease testing, microbiology testing and testing services for milk recording organisations. In essence they are another NML but located in Ireland.
“Payment testing services” namely NML + iML provide circa 20% of Group turnover.
Nordic Star was founded in 1996 and joined with NMR in 2007. They are a key player in the animal identification market providing the well-known yellow plastic tags often seen in the ears of cattle and other livestock namely pigs, goats and sheep.
“Traceability services” provide circa 5% of Group turnover.
Genetracker is NMR’s most recent venture and is a genomic testing service that involves extracting a small tissue sample from the animal’s ear (can be combined with tagging) which results in creation of a genotype which informs the farmer of the health and fertility of his animal(s) allowing him to best manage his herd with respect to selecting only the best animals (healthiest, best milk yields etc) for breeding and in doing so increasing his (well earned) profits.
The Group also owns 100% of the ordinary shares in Dutch listed firm Genimex Holding BV (“Genimex”).
“Reproduction services” provides the remaining 5% of Group turnover.
A good overview of the NMR plc business is provided in this short corporate video:
There is lots of cross-selling across these businesses and since decoupling itself from the significant financial burden of the Milk Pension Fund (MPF) back in June 2017, NMR growth potential has started to reveal itself.
The Milk Pension Fund (MPF)
The Group’s previous commitment to the Milk Pension fund was a legacy issue dating back to the days of the Milk Marketing Board (MMB) which was founded way back in 1933 to protect farmers against instability and from a buyer-dominated market and it was from these roots that the NMR business was eventually born.
NMR was one of seven participating employers of the Fund along with the likes of Genus plc (a major shareholder in the Group), and despite NMR making payments into the fund totaling £2.7m in the 5 yrs ending March 2016, it was expected to make at least £10m of further contributions over the ten years to March 2026 and potentially further contributions for a further 50 years beyond 2026. Although revenues were increasing nicely year-on-year, the MPF obligations was stifling an otherwise profitable business.
On 1st June 2017, NMR announced it was raising £7.33m by means of a subscription at 65p share. Along with existing resources and a new bank facility this would allow them to exit from their onerous MPF commitment to the tune of £10.8m. The Chairman noted:
“Our liabilities to the Milk Pension Fund have been a key issue for the Company, restricting its ability to attract new investment. We believe that withdrawal from the fund will facilitate growth, enabling NMR to focus on its cash generative core business and rebuild its historic strong balance sheet. Furthermore, it will give shareholders and potential investors in the Company greater clarity as to the Group’s underlying performance, whilst freeing up valuable resources and management time.”
With the ordinary share count consequentially rising from circa 7.5 million shares to just over 21 million shares, the exit from the MPF was very dilutive for existing shareholders but it was a necessary evil and was well-supported whilst also bringing new shareholders onto the register. More on that below!
To suitably capture this significant event, the Group also changed its year end from 30th March to 30th June.
Since the exit from the MPF, the NMR management team have been busy getting their ship in order, disposing of the investment in Inimex Genetics Ltd to Genus plc, investing in laboratories and launching new services such as Johne’s screening, Bovine Viral Diarrhoea (BVD) testing and Genetracker.
The Boardroom has also been streamlined with three Executive Directors leaving, Trevor Lloyd moving from NED to Chairman and Mike Gallacher joining as a new NED bringing with him a strong agricultural and management experience (ex-CEO of First Milk / UK MD of Mars Petcare).
Most recently, in May 2018, the company proposed a Reduction of Capital and the adoption of New Articles to eliminate a profit and loss deficit of £11.4m and a sum of £7.4m standing to the credit of the Company’s share premium account; these being a hangover from the MPF exit. This was approved by the High Court in June 2018 and will facilitate the future payment of a dividend.
The major shareholders of the Group comprise:
- Aurora Nominees (aka Singapore based fund manager Working Capital Management or ‘WCM’) – 29.7%
- New Zealand based dairy farmer cooperative ‘Livestock Improvement Corporation’ (LIC) – 19.8%
- Genus plc – 10%
- Investment company UIL Ltd (formerly ‘Utilico’) (link) – 13.9%
- High Net Worth individuals (including Mr Vaughan Moody MP) – 6.6%
- Retail Investors – 20%
Subscribers to new shares offered under the exit from the MPF included existing major shareholders LIC, Utilico and Mr Vaughan Moody with Working Capital Management joining the register for the first time.
The shares have enjoyed a decent rally since 2014 with an added fillip from June 2017 (post MPF exit) pushing the price up from circa 75p to current levels.
With the shares priced in the market at £1.08, NMR has a market cap of £23m. The Group’s ambition over the next 5 years, however, is to grow to a market cap of £60 million, with EBITDA of £3-3.5 million and a dividend yield of 2%. Sounds great but how are they going to achieve this?
The first set of results following the exit from the MPF were the interim results for the 6 months to 31st Dec 2016 as announced to the market in February 2018 and showed turnover increasing at the half year to £10.5 from £9.4 million, with PBT of £0.96 million, net assets of just over £1 million and a very healthy £1.1 million of cash generated from operations.
Results for the first full year of trading outside the confines of the MPF are due to be announced to the market on 1st October 2018 and with gross profit margins in excess of 50%, I believe they will show some healthy metrics with operating margin, ROIC, ROCE, ROA all well into double figures.
Despite the balance sheet historically looking a little shaky and the Group now having some long-term debt (bank loans totalling circa £4 million), the interest payments going forward are very well covered (10x) and the cash generative nature and high levels of free cash flow (£1.5 million / annum) could see these loans paid off before the December 2024 expiry date and the balance sheet can now strengthen over time.
The Group also own freehold property with a market value of £1.2 million (my estimate).
Growth & Corporate Activity
The growth of the Group clearly hinges on genomics and testing services and this isn’t just limited to cattle; the porvine (pigs), ovine (sheep) and caprine (goats) sectors also offer growth opportunities.
With increasing adoption of genomic testing over the pond in the USA, NMR believe there is a market for of up to 200,000 such tests in the UK and hence has the potential to add 25% to annual Group turnover.
The Agricultural and Horticulture Development Board (AHDB) has already commissioned NMR to provide 10,000 such genomic tests as part of a project to expand the national database with the aim of helping predict animals with a high resistance to TB (link).
Whilst currently trading on the NEX, the Board have not ruled out a move on the AIM market although I anticipate this would likely be done in tandem with some future earning-accretive corporate activity, in line with the Board’s keen focus on growth.
Risks / Competitors
There are risks with any investment. The key ones for NMR are:
- Outbreak of Foot & Mouth disease or similar – any decline in cattle herds will result in less milk recording and consequentially less related testing and other services.
- Fire, flood or other ‘act of God’ at their laboratory facilities where currently they have no disaster recovery plan in place.
- Sustained drop in milk prices resulting in farmers being less inclined to pay for discretionary services.
The Board have noted that Brexit will most likely be ‘broadly positive’ for the Group rather than a negative given the import / export profile of dairy products.
With respect to competitors, NMR have a duopoly with the Cattle Information Services (CIS) on UK milk recording with United Dairy Farmers (link) also having a small localised market share. NML are in an even more favourable position with a clear monopoly on testing services.
When it comes to genomics, Genetracker is a new venture and NMR have competition from other well established players such as the CIS and Holstein UK (amongst many others). With NMR’s inherently long-standing and deep relationship with UK dairy farmers, however, I believe they will be seen as a trusted advisor from which to leverage this new venture. Only time will tell.
In summary, I like the simple, duopolistic and cash generative nature of this business and bought shares around 100p earlier this year.
In Part 2 of this article I will share my thoughts on the eagerly awaited final results once released on 1st October and hopefully provide some analysis of the numbers.
Watch this space!
At the time of publication, the author has a long position in NMRP.