The A2 Milk Company Limited

A2M Details

H1FY21 Performance Update: The A2 Milk Company Limited (ASX: A2M) is a dairy nutritional company. The market capitalisation of the company as on 06 April 2021 stood at ~$5.76 billion. The company has reported a revenue of NZ$677.4 million during H1FY21 and an EBITDA of NZ$178.5 million. The results were impacted owing to the disruption witnessed in the daigou and CBEC channels due to the impact of the COVID-19 pandemic. The NPAT stood at ~NZ$120 million during the period. However, the company reported decent performance in liquid milk in Australia with a growth of ~16.3% in revenues during the period.

H1FY21 Financial Performance (Source: Company Reports)

Outlook: A2M plans to continue to invest in the brand, and re-activate the Australian daigou channel. Due to the impact in its key channels, it expects revenue to be at the lower end of the guidance level. It expects FY21 revenue to be around ~NZ$1.4 billion, and Group EBITDA margin to be ~24% to 26%.

Key Risks: The company’s business has been impacted due to the COVID-19 pandemic on its business and the business disruption in its key strategic channels. Further uncertainty in the business environment with the virus still lingering, may impact the financial performance of the company in the short term.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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.

*** 1 NZD =~ 0.92 AUD

Stock Recommendation: The stock is currently trading in under bought region and there is a possibility that it might rebound in the near future, based on technical assessment. As per ASX, the stock of A2M is trading below its average 52-weeks’ levels of $7.710-$20.050. The stock of A2M gave a negative return of ~16.97% in the past one month and a negative return of ~1.02% in the past one week. On a technical analysis front, the stock of A2M has a support level of ~$6.996 and a resistance level of ~$9.612. We have valued the stock using a P/BV multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a slight discount to its peer average P/BV (NTM Trading multiple), considering the business disruption in the daigou/reseller and CBEC channels and volatility associated with the COVID-19 pandemic. For the purpose, we have taken peers such as Bega Cheese Limited (ASX: BGA), Bubs Australia Limited (ASX: BUB), to name a few. Considering the expected upside in valuation, current trading levels and growth in China label infant nutrition products, we recommend a ‘Buy’ rating on the stock at the current market price of $7.730, down by 0.259% as on April 06, 2021.

A2M Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Keytone Dairy Corporation Limited

KTD Details

Award of Tender: Keytone Dairy Corporation Limited (ASX: KTD) is engaged in the manufacture and export of dairy products. The market capitalisation of the company as on 06 April 2021 stood at ~$49.15 million. The company has been awarded a Coles Private Label Tender by Coles Supermarkets on 7 December 2020. The tender has been valued at $5.2 million per annum and KTD anticipates that the contract term will be longer than the initial twelve-month period.

Q3FY21 Performance Update: During the quarter, the company delivered a resilient performance with an increase of ~36% in the sales of the proprietary branded products to more than $1.4 million, compared to the prior quarter. The growth was supported by the launch of Tonik Plant and Tonik Pro in Coles stores during the period. It reported total sales of $13 million during the period. There has been improvement in the net cash outflow from operating activities to $90,000, driven by the improved working capital management, growing business and new client wins.               

Q3FY21 Financial Performance (Source: Company Reports)

Outlook: KTD has reported an optimistic outlook and has said that the forward purchase orders are tracking ahead of supplied client forecasts through the first quarter of the calendar year 2021. It also expects additional volume growth and demand for Tonik through its existing channels.

Key Risks: The company is exposed to a few risks inherent to business like foreign currency risk, interest risk, credit risk and liquidity risk. In this regard, KTD has specific risk management frameworks in place in order to mitigate the risk.

Stock Recommendation:  As per an update on 5 March 2021, the company has announced that its performance milestones on its Class C Performance Shares have been met and hence will be converted to fully paid ordinary shares. As per ASX, the stock of KTD is trading below its average 52-weeks’ levels of $0.165-$0.460. The stock of KTD gave a negative return of ~5.26% in the past one month and a positive return of ~5.88% in the past one week. On a technical analysis front, the stock of KTD has a support level of ~$0.165 and a resistance level of ~$0.244. On a TTM basis, the stock of KTD is trading at an EV/Sales multiple of 1.4x, lower than the industry average (Consumer Non-Cyclicals) of 6.1x. Considering the current trading levels and the valuation on TTM basis, decent financial performance, improvement in the cash flow from operations and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.180 as on April 06, 2021.

KTD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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