Growing consumer awareness of food quality and sourcing is giving a fillip to NEX-listed National Milk Records PLC (LON:NMRP) .
A part, once, of the now defunct Milk Marketing Board, NMR carries out quality checks on a million dairy cows throughout the UK.
That’s a lot of milk and Andy Warne, chief executive, says the business involves a lot of legwork.
Seven million miles
Indeed, the business notches up an average 7mln miles a year in journey time.
Some 450 field technicians make monthly visits to each of the farms on its roster and check milk for fat and protein levels – the higher they are, the more valuable the milk.
Although voluntary, Warne says farms that use the recording can generate yields up to 30% higher than those that don’t.
The data helps to reinforce what the farmer presumably knows intuitively about the quality of a herd.
Weaker producers are weeded out and those that remain boost the overall performance.
WATCH: National Milk Records' Andy Warne discusses operations and significant growth prospects
NMR also carries out a quality control service on behalf of the milk suppliers by testing a sample of milk daily from every farm, again for fat and protein but also for antibiotics or other unwanted substances.
Warne admits there is an element of poacher/gamekeeper here as it is the quantity of protein and fat in the milk that determines how much a farmer gets paid.
Anything amiss in the sample could mean a farmer gets nothing.
NMR has to get the results of its sample tests back to the dairy companies by 6am the following morning, otherwise its gets penalised.
Warne says it is a very intense operation, a sample is tested in less than a second all through the night, but it’s the same test every time and NMR has been doing this for a long time.
Milk the staple
Milk is the staple of the business but Warne is now looking at ways to leverage this sampling nous and expand into other areas.
On the recording side, NMR works with just over half of the UK dairy herd or about one million animals.
The aim is to increase the use of value-added services and in particular, the latest tech to identify the productive animals and potential problems.
A test for wasting disease Johne’s, for example, can be taken from the same sample of milk when it is tested for quality.
Warne, though, is especially keen on NMR’s new gene tracker offering, which combines the DNA profile of a cow with the milk yield information it already possesses.
The trick, he admits, is to persuade the traditionally conservative farming community, it is worth the £30 cost, but with a dairy calf costing £2,000 to get to the point where it starts to produce, he thinks eventually, the farmers will see it pays for itself.
Market penetration of gene tracker is negligible currently, but Warne points to the US where gene tracking has a 15% market share.
Replicated in the UK, that would generate 150,000 times £30 to NMR, or a quarter of current revenue.
Business this year has picked up anyway as the milk price crisis has eased, allowing growth in ancillary services such as dairy capital equipment sales.
A settlement over its contribution to the Milk Pension Fund has eased another burden.
Pension relief
While this cost, more than £10mln in cash and shares in a one-off payment, the annual contribution to the fund was over £1mln and its end is giving much more financial flexibility.
NMR is now even looking at a dividend payment once it restructures its balance sheet to remove a historical reserves deficit.
This may be modest at first, says Warne, as he also wants some funds to explore moves into the beef industry, where NMR has zero presence and even maybe sheep.
Brexit, in particular, is likely to force UK beef farmers into looking at ways of differentiating their product.
Interim results showed sales rose 11% to £10.5mln while underlying profits were 40% ahead at £1.19mln.
Cash generation from operations was £1.1mln, while net debt dropped to £3.3mln.
The target going forward is for sustainable annual earnings of £3-3.5mln, a dividend yield of 2% and market cap of £60mln.
NMR is only currently valued at £19mln (at 91p), so it is a decent target, but with where food comes from becoming ever more important to consumers, it should have a decent tailwind.