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Why Australian Dairy Farms Group shares have more than tripled in price

The share price of Australian Dairy Farms Group (ASX: AHF) has surged nearly 67% today to trade at 55 cents. Better yet, shares have risen an incredible 279% since Tuesday last week, at which time they were placed in a two-session trading halt.

Source: Google Finance

Source: Google Finance

The strong gains have come after the company announced a binding agreement to acquire the Camperdown Dairy Company (CDC), an established dairy processing business, from Aussie Farmers Direct. Australian Dairy Farms will fork out $11 million for the business, funded by cash reserves and bank facilities, and this will create the ASX’s first vertically integrated dairy company as a result.

CDC has a growing blue-chip customer base and processes Woolworths Limited’s (ASX: WOW) “Farmers Own” brand of premium milk in Victoria. It’s also one of only a small number of Australian dairy companies with China Inspection Quarantine (CIQ) certification for the rapid clearance of fresh milk into China.

That puts the business in a good position to benefit from the growing demand in China for Australian-produced dairy products, alongside Bellamy’s Australia Ltd (ASX: BAL) (which produces infant formula) and the New Zealand-based A2 MILK FPO NZ (ASX: A2M).

According to the release, Camperdown’s milk processing facility is located near Australian Dairy Farms’ six dairy farms which are located in south western Victoria. The company believes the acquisition will create significant margin expansion opportunities and synergies while it “has the potential to more than double AHF’s anticipated (earnings before interest, tax depreciation and amortisation, or EBITDA) in the 2017 financial year.”

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.