The a2 Milk Company Limited
A2M Details
The report is an updated version of the report published on 30th May 2022 at 3:55 pm GMT.
Financial Update: The a2 Milk Company Limited (ASX: A2M) markets branded milk and associated products under its intellectual property in Australia and New Zealand, the UK, the USA, China, and other Asian countries. On 19 May 2022, BlackRock, Inc. and related bodies corporate became a substantial shareholder, with a total percentage held in class at 5.029%.
- Major Corporate Events: Mataura Valley Milk’s acquisition and strategic partnership with China Animal Husbandry Group was completed in July 2021. Brand health metrics improved following a considerable marketing campaign in Q2FY22.
- Financial Stance: Revenue was marginally lower than H1FY21 guidance. EBITDA was down by 45.3% PcP to NZ$97.6 million. The balance sheet stood firm with a closing cash balance of NZ$747.2 million as of 31 December 2021.
H1FY22 Financial Snapshot; Analysis by Kalkine Group
Key Risks and Challenges
Market conditions continued to be challenging as the China IMF market slipped by 3.3% in value during H1FY22, mainly attributed to the cumulative impact of the lower birth rate. In contrast, the US and Australia liquid milk markets fell in the expansionary zone. The company is exposed to legal hassles and currency price fluctuations.
Outlook
A2M’s expectations for H2FY22 revenue have improved. China label IMF sales are forecasted to increase in FY22 and are now estimated to be substantially higher in H2FY22 than in H1FY22. Incremental sales growth in Australian liquid milk for FY22 remains on track with a likely slowdown in H2FY22.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
Source: Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock’s historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: The stock of A2M gave a negative return of ~13.43% in the past year. The stock is currently trading lower than the 52-weeks average price level band of $3.900 - $7.450. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). Considering the market challenges in China label IMF and shrunk bottom line, the company might trade at some discount to its peers. For valuation, a few peers like Australian Agricultural Company Ltd (ASX: AAC), Tassal Group Ltd (ASX: TGR), Bubs Australia Ltd (ASX: BUB) and others have been considered. Given the low trading levels, increase in liquid milk volumes in Australia, synergies expected from the acquisitions and strategic partnerships, continued investment in brand building, upside indicated by valuation, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $4.500, as of 30 May 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.
A2M Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should depend on the investors’ appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the aforementioned factors.
Technical Indicators Defined: -
Support: A level where-in stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
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