National Milk Records [LON:NMRP], a market-leading agritech supplier of dairy and livestock information for farmers, processors, and retailers has recently released interim results. The company claims that farmers are carrying more risks, especially with decreasing margins from rising inflation, and many reductions already announced for deliveries.
Facing the situation with less free cash, rising costs for investment, and higher input costs, farmers need data-driven insights more than ever. Maximizing the efficiency of a herd is the most direct route for the dairy industry to achieve its growth and sustainability objectives, and National Milk Record (NMR) can provide this service.
Operational model
National Milk Record makes its revenue through three different services:
Payment testing means National Milk Records gets a bulk milk sample from every dairy farm in Great Britain every day, and they test that for fat and protein. This enables the processor and the retailer to pay the farmer according to the quality of their milk. NMR also tests for contaminants and herd health issues. In payment testing, NMR has a 100% market share.
The second revenue stream is milk recording. In this business, the National Milk Records deals with about 50% of the dairy farms in the UK. NMR will have a field technician visit the farm once a month and take an individual milk sample from every cow that’s milking on that day. This provides the fat and protein content of the milk of the individual cow. This time, the information will be given back to the farmer, so that the farmer can understand the better cows and poorer cows in terms of performance.
National Milk Records has a new and emerging revenue stream, with good growth at the moment: Genomics. This is a disruptive technology that allows NMR to drive innovation in pharma-facing services. Genomics uses the DNA database that National Milk Records already has, mapping it onto the new born calf’s DNA to get an accurate prediction about how this cow will perform in the future. This enables the farmer to decide which calf to take good care of and breed more of the good performer, a way of selective breeding. The genomic sales were up 94% from 2022, though we should also consider the small baseline (3.3% of total revenue).
Sector analysis
National Milk record’s performance has a very strong correlation with the dairy industry.
In general, milk sales volumes are quite stable, moving around 5,200 million litres per year. Spending on dairy products does show some growth over the years, but accounting for inflation, growth has not been significant. This could be rooted in the dairy industry being already mature, facing a saturated market, and declining demand due to rising milk alternatives like oat milk or almond milk.
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According to Ibis World, per capita milk consumption is forecast to fall at a compound annual rate of 1.6% over the five-year period through 2023-28. Despite 96% of British adults currently purchasing milk on a regular basis, ongoing concerns with regard to health, ethics, and the environment are likely to intensify, further dampening consumers’ propensity to maintain a high intake of dairy milk.
On the upside, the industry has a low concentration, with a lot of individual farms. This could be good news for NMR because servicing an industry that is not yet consolidated means the individual farms will not have much bargaining power, hence if the cost of sales is rising, the price increase from NMR would be relatively easy.
Helping to improve sustainability
We have mentioned milk consumption is slowly declining due to the rising trend of veganism, and concerns about the environmental damage caused by the farming industry. In 2020, when compared to total emissions from all sectors, agriculture was the source of 11% of total GHG emissions in the UK, 69% of total nitrous oxide emissions, 48% of total methane emissions, and 1.7% of total carbon dioxide emissions.
NMR has quoted an old saying ‘if you can’t measure it, you can’t manage it’. Indeed, NMR is very involved in measuring data in the milk industry, and the new genomics technology could really help farmers to select calves that emit less GHG yet have a high yield, to help the industry become more environmentally friendly and more efficient. Hopefully, this initiative will alleviate consumer concerns about environmental damage when it comes to cattle raising. But this covers not only environmental concerns – NMR also helps with animal welfare. The service NMR provides detects diseases in animals, which helps with treating the infected animal earlier.
Emerging technology
We can see the genomic technology that NMR promotes really improves the efficiency of the selective breeding process. In March 2022, NMR announced that it had secured an exclusive license for the exploitation of its GenoCells technology in the United States of America.
To explain this technology in layman’s terms, it can detect mastitis by one sample of milk from a bulk tank, without the need to sample and test the individual animals within the herd. This provides farmers with a quick and easy method for the identification and treatment of individual animals for mastitis conditions, which is a key payment parameter for milk buyers in both the UK and the US. It provides information to facilitate the reduced usage of antibiotics in the herd, providing further health and economic benefits.
Financial and operational highlights from NMR’s interim result
Even though the milk industry is facing slight pressures, NMR is still experiencing growth. The turnover for the six months ended 31 December 2022 increased by 5.0% to £12.0 million, the like for like EBITDA for the period increased by 17.0% to £1.34m, while underlying EBITDA for the period decreased by 8.8% to £1.05m. The decrease in the underlying EBITDA is caused by significant investment in the US GenoCells project and the reorganisation costs of labs.
The investment in tangible and intangible assets was up 83.3% to £1.1m, and there was successfully deleveraging with net debt down 14.2% to £0.9m (2021: £1.1m). The net assets also increased 30% to £9.3m, and NRM now pays a 2p dividend, a modest 1.78% yield. NRM has been paying dividends since 2018, and has never missed one dividend payout.
Mark Frankcom, Finance Director of NMR, commented: “The first half of the financial year has seen significant capital investment, putting the company in a strong position for the second half of the year and beyond, as we continue to pursue our strategic plan. We are installing the IT infrastructure to deliver GenoCells in the UK and US markets, and intangible investment also includes €375,000 for the second half of the licence for GenoCells in the US. Tangible fixed assets includes a substantial investment in our Four Ashes laboratory to support the cost-saving initiative to consolidate milk testing.”
NMRP is trading now at 112 pence, with a 52-week range of 98.5 – 122. If investors believe that genomic technology can be the next growth divers for NMRP and the dairy cattle raising industry, this is a stock could really go places.
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