The A2 Milk Company Limited
A2M Details
Decent Revenue Growth Across All Key Regions: The A2 Milk Company Limited (ASX: A2M) is primarily engaged in the sale of branded products made with milk from cows that produce milk naturally containing only the A2 protein type. On 11 August 2020, the company announced that it has appointed David Bortolussi as the Managing Director and CEO, based in Sydney. David is likely to begin in the role by early CY21.
1HFY20 Key Financial Highlights: During the half-year ended 31st December 2019, total revenue increased by 31.6% to NZ$806.7 million. Net profit after tax came in at NZ$184.9 million, up 21.2% on pcp, indicating strong growth across core markets and product categories. In the latest trading update released on 22nd April 2020, the company notified that since the release of half-yearly results on 27th February 2020, revenue grew strongly in all key regions, particularly in respect of infant nutrition products sold in China and Australia. The company also confirmed that its revenue for the 3 months ended 31st March 2020 went beyond expectations, impacted by changing consumer behavior due to COVID-19.
Key Financial Highlights (Source: Company Reports)
Outlook: The company expects FY20 revenue to grow across its key regions, on the back of increased levels of marketing investment in China and the USA. Despite the uncertainty associated with COVID-19, the company expects FY20 revenue to be in the range of NZ$1,700 million to NZ$1,750 million. Further, the company expects EBITDA margin to be between 31% - 32% for FY20. While the company revised its FY20 EBITDA margin guidance based on the factors discussed above, it is unlikely that these factors will be sustained as the unprecedented circumstances begin to unwind. Therefore, the company targets an EBITDA margin of ~30% in the medium-term. The company will be releasing FY20 results on 19th August 2020.
Risk Analysis: Since the company supplies products for human consumption, its business is inherently exposed to potential product quality, food safety or food integrity events that may cause concerns among consumers and can impact brand reputation. Increasing competitive intensity can lead to erosion of market share in core markets, thereby, impacting revenues. Notably, the business’ success is underpinned by key relationships with strategic partners, including key supply and distribution partners and any reduction in support from such parties can impact operations.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E Multiple Based Relative Valuation Approach (Source: Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The stock of the company gave positive returns of 25.46% in the last six months. Over a period of three months, the stock has generated positive returns of 7.56%. The stock price has recorded buoyant growth after solid revenue growth across all regions, despite the COVID-19 related challenges. Moreover, continued marketing investment and maintenance of guidance were other positive factors contributing to growth. During 1H20, gross margin of the company stood at 57.2%, higher than the industry median of 41.5%. On the technical analysis front, A2M has an immediate support level of ~A$17.6 and a resistance level at ~A$19.718. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price with a correction of single-digit (in percentage terms). For the purpose, we have considered peers like Wesfarmers Ltd (ASX: WES), Woolworths Group Ltd (ASX: WOW), and Blackmores Ltd (ASX: BKL). Considering the valuation and current trading levels, we have a watch stance on the stock at the current market price of $19.52, up by 2.36% on 17 August 2020.
A2M Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Althea Group Holdings Limited
AGH Details
Record Revenue & New Patients in July: Althea Group Holdings Limited (ASX: AGH) is engaged in the sales and distribution of medicinal cannabis products along with the development of a manufacturing and cultivation facility. The market capitalisation of the company stood at ~A$81.66 million as on 17 August 2020. Recently, the company updated the market on its Australian and UK operations. Pertaining to the company’s launch of online sales of its medicinal cannabis products in Australia, it stated that as at July 2020 end ~8,034 patients have been prescribed Althea medicinal cannabis. Further, it also stated that ~740 patients were prescribed Althea products for the first time in July as compared to 582 in June, with unaudited revenues amounting to $692,091. Coming to the UK operations, MyAccess Clinics is witnessing better than expected patient demand during the period.
Patient Growth in Australia (Source: Company Reports)
Key Highlights for Quarter Ended 30 June 2020: During the period, the company’s unaudited revenues amounted to $1.59 million, reflecting a rise of 5% from March quarter. The company further stated that cash receipts from customer totalled $1.53 million for the quarter. For FY20, revenue increased a whopping 547% year over year $4.97 million. At the end of the quarter, the company remains fully funded with ~ $10.4 million cash on hand. As per the release, the company has reached 7,295 patients who have been prescribed Althea medicinal cannabis products in Australia, with 590 Healthcare Professionals having prescribed Althea medicinal cannabis.
Cash Highlights (Source: Company Reports)
AGH Unveils Online sales of Althea Concierge™: In another update, the company stated that it has completed the launch of Althea Concierge™, AGH’s TGA registered medical device. Althea patients can now buy products online via Althea Concierge™ and have them transported directly to their door, eliminating the requirement to visit a doctor or pharmacy.
Other Recent Updates: The company stated that its wholly-owned subsidiary, Canadian-based Peak Processing Solutions (‘Peak’), has inked a cannabis beverage production contract with Collective Project Limited. As per the deal, Peak will be engaged in manufacturing and distributing cannabis-infused canned beverages on behalf of the Collective Project.
Future Prospect: The company is focusing on sustained growth in shareholders’ wealth, comprising of dividends and growth in share price, and giving constant or increasing returns on assets along with focusing the management on key non-financial drivers of value.
Risks: The main risks of AGH is exposed to through its financial instruments are foreign currency risk, interest rate risk, liquidity risk and credit risk. On the flip side, the company is exposed to shorter-term disruptions from challenging macro-economic environment due to COVID-19 led outbreak. The company also faces stiff competition from peers.
Stock Recommendation: As per ASX, the stock of AGH gave a negative return of 5.41% in the past six months and a negative return of 10.26% in the last three months. The stock of AGH is trading below its 52-week average levels. The company’s focus on patient care underpins its business strategy. Debt to equity ratio of the company stood at 0.05x in Dec’2020, lower than the industry median of 0.13x, depicting a decent financial position. On the technical analysis front, AGH has an immediate support level of ~A$0.305 and a resistance level of ~A$0.389. On a Trailing Twelve-Month basis (TTM), the stock is trading at an EV/Sales multiple of 7.1x, lower than the industry median (healthcare) of 11.9x. Hence, considering the aforesaid facts, current trading level, valuation on TTM basis, and future focus, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.375 per share, up by 7.143% on 17 August 2020, owing to the recent trading update.
AGH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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