Keytone Dairy share price storms 14% higher on new licensing agreement

The Keytone Dairy Corporation Ltd (ASX: KTD) share price is making a splash today after the ASX dairy share announced a new licensing deal.

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The Keytone Dairy Corporation Ltd (ASX: KTD) share price is making a splash today, up 14.29% at the time of writing to 32 cents.

Keytone is a manufacturer and exporter of formulated dairy products in Australia and New Zealand.

The company manufactures its own products under its KeyDairy, KeyHealth and FaceClear brands. These products include premium milk and nutrition powders and health supplement capsules for the treatment of acne. Additionally, Keytone is a production partner for leading retailers and supermarket chains, undertaking contract packing services for brands around the world.

Headquartered in the heart of New Zealand's South Island, Keytone Dairy floated on the ASX in July 2018 at an offer price of 20 cents. Its current market capitalisation stands at just over $80 million at the time of writing.

Why is the Keytone Dairy share price spiking today?

Keytone Dairy shares took off in early trade this morning after the company announced a licensing agreement for a range of Baileys iced coffee drinks. The agreement gives Keytone a distribution license for these products in Australia, New Zealand, Hong Kong and Taiwan.

The "non-alcoholic coffee flavoured ready-to-drink dairy products", which come in 3 flavours, are currently stocked nationally throughout Caltex petrol stations in Australia. A further national ranging at Beer Wine Spirits, part of the liquor division at Woolworths Group Ltd (ASX: WOW), is "expected imminently". Keytone will also look to roll-out the licensed Baileys range through its existing national distribution footprint.

As well as the iced coffee drinks, the agreement also includes premium Baileys powdered beverages which will be introduced to the market from 1 August 2020.

According to Keytone, initial indications for distribution opportunities in New Zealand, Hong Kong and Taiwan are promising, with "strong demand and upside expected over the short to medium term".

The company will pay a minimum royalty of $280,000 for the license through to the end of the initial license period on 31 December 2022. Keytone expects the sales through this period to be "magnitudes higher" than the license cost, while delivering further margin benefit to the company. The range will be manufactured in-house at Keytone's Melbourne facilities.

Commenting on today's update, CEO Danny Rotman said:

"The licensing deal with a global company such as R & A Bailey & Co. and the Baileys brand validates the credentials of Keytone, positioning the Company for further distribution channel wins for the full proprietary product suite and provides a stepping stone for licensing of further global brands. This is a valuable contract win for the sales opportunity directly attributed to the Baileys branded products, and the significant upside this brings across the Company's proprietary products."

Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths Limited. 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 Scott Phillips.

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