The a2 Milk Company Limited

A2M Details

Upcoming AGM and Director Nominations: The a2 Milk Company Limited (ASX: A2M) is a nutritional dairy company that markets A2 protein type branded milk and related products in Australia, New Zealand, the US, and Asia. A2M will conduct a virtual AGM (Annual General Meeting) on 17 November 2021 and will send a Notice of Meeting to all shareholders before the meeting.

Change in Shareholding: On 8 September 2021, Mitsubishi UFJ Financial Group, Inc., Mitsubishi UFJ Trust and Banking Corporation, Mitsubishi UFJ Kokusai Asset Management Co., Ltd., First Sentier Investors Realindex Pty Limited, First Sentier Investors (Australia) IM Limited reduced their voting power from 6.7% to 5.36%.

FY21 Result Takeaways: 

• Decline in Revenue: The company reported NZ$1.21 billion revenue, down by 30.3% YoY in FY21. The lower revenue is due to COVID-19 impact, channel inventory imbalance, and hurdles witnessed in the English label infant nutrition channels.
• Infant-Nutrition-China Label Channels: A2M posted NZ$389.9 million sales in China label infant nutrition channels, depicting a rise of 15.4% YoY in FY21.
• Lower Operating Cash Flows: A2M generated lower net operating cash flows of NZ$89.41 million in FY21 versus NZ$427.41 million in FY20.
• Liquid Milk Revenue Up: The Australian fresh milk revenue rose to NZ$169.0 million, up by 10.8% YoY in FY21, mainly due to higher in-home consumption in 1HFY21 due to COVID-19 lockdowns.
• Executive Team Expanded: The company has made additions to the Executive Leadership Team and reorganised the Asia Pacific division during FY21. A2M added Bernard May as the CEO of MVM and appointed Edith Bailey as the new Chief Marketing Officer.
• MVM Acquisition: On 30 July 2021, A2M acquired a 75% interest in Mataura Valley Milk (MVM) in collaboration with China Animal Husbandry Group.

Cash and Cash Equivalents Highlight; (Analysis by Kalkine Group)

Key Risks: The company faces the impact of COVID-19, excess inventory management, and supply chain challenges on its business operations. A2M also faces credit, liquidity, and market risks, including forex headwinds (stronger NZD relative to USD/RMB).

Outlook:

• In FY22, A2M plans to increase China’s marketing and brand investment to drive demand and improve brand health metrics.
• A2M expects robust underlying growth in key accounts in the US liquid milk business and incremental sales growth in Australian liquid milk in FY22.
• With the Chinese partnership, A2M expects to manufacture nutritional products, grow China label registrations, and develop product innovation avenue.
• For the China label infant nutrition, A2M expects to grow sales and seek moderate market share by acquiring new users and increasing distribution in FY22.

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 18.07% in the past month and a negative return of 11.35% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level band of $5.040 - $17.240. The stock has been valued using an Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers’ average, considering the inventory rebalance achieved for CBEC and daigou/reseller channels in FY21, expected growth in the USA and Australian liquid milk business in FY22. For the purpose of valuation, few peers like Bubs Australia Limited (ASX: BUB), Food Revolution Group Limited (ASX: FOD), Inghams Group Limited (ASX: ING), and others have been considered. Considering the current trading levels, growth in Australian milk and Infant-Nutrition-China Label sales in FY21, strategic investment, growth outlook for the US and Australian liquid milk in FY22, increased marketing spends in China in FY22, valuation upside, we give a ‘Buy’ rating on the stock at the current market price of $5.620, as on 24 September 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

A2M Daily Technical Chart, Data Source: REFINITIV  

Bubs Australia Limited

BUB Details

BUB Removal from the S&P Index: Bubs Australia Limited (ASX: BUB) offers infant formula products and produces organic baby food, goat milk, fresh dairy products. As per a recent quarterly review by S&P Dow Jones Indices, BUB was removed from the S&P/ASX 300 Index before the trade opened on 20 September 2021. 

FY21 Highlights:

• Gross Margin Declined: The gross margin declined to a loss of $7.3 million in FY21 due to inventory write-off and loss incurred on the sales of bulk powder for cash conversion.
• Steady Goat Formula Gross Margin: BUB maintains the goat formula gross margin at 34% in sync with FY20, with a 21% increase in gross margin of branded products due to higher trade spend domestically and channel mix changes.
• Growth in China: BUB experienced gross revenue growth of 26% YoY in its Infant Formula Cross-Border E-Commerce (CBEC) channel in FY21.
• Discipline OpEx: Marketing costs decline by 28% YoY because of the domestic brand marketing investment in the near-term in-channel activity.
• International Expansion: In FY21, BUB expanded across South-East Asia and registered an international gross revenue growth (ex-China) of 57% YoY. BUB entered the US in September 2021 with a toddler range launched on Walmart.com.
• Healthy Balance Sheet: BUB held $27.88 million cash and cash equivalents and total debt of $4.15 million as of 30 June 2021.

Total Revenue & Net Loss After Tax from FY18-FY21; (Analysis by Kalkine Group)

Key Risks: The company is exposed to the impact of the COVID-19 leading to an acute shortage of demand and a steep fall in revenue. BUB continues to experience subdued Daigou sales, higher costs of outbound overseas supply chain logistics.

Outlook:

• The company is well-placed to grow the Bubs® brand in new categories and consumer segments.
• BUB is redoing its China strategy with its key partners and developing the Bubs® brand in China. It anticipates sales momentum to persist across channels.
• BUB intends to increase brand awareness and strengthen its specialist dairy producer position in new categories. The company will continue its global expansion strategy to solidify its regional market penetration and enter North America.

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 BUB gave a negative return of 19.76% in the past month and a negative return of 26.59% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.315 - $0.830. The stock has been valued using an Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ average, considering the COVID-19 led uncertainties, the risks associated with the increased freight costs, impact on sales channels, demand, and outbound supply chain logistics. For the purpose of valuation, few peers like Select Harvests Limited (ASX: SHV), Bega Cheese Limited (ASX: BGA), Murray Cod Australia Limited (ASX: MCA) have been considered. Considering the current trading levels, international business revenue growth, sales momentum across various channels, valuation, and business risks mentioned above, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.345, as on 24 September 2021, 2:48 PM, (GMT+10), Sydney, Eastern Australia.

BUB Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and 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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