The a2 Milk Company Limited

A2M Details

 Recent Business Update: The a2 Milk Company Limited (ASX: A2M) is a nutritional dairy company that commercialises A2 protein type branded milk and related products in New Zealand, Australia, China, and other Asian countries the United States. As announced on 20 December 2021, A2M provided funding for its Long-Term Incentive Plan and Employee Share Plans which constitutes financial aid under section 76 of the Companies Act 1993. The total funding amount stood at NZ$4.11 million, paid in cash.

FY21 Financial Performance

• Shredded Top-Line: Revenue edged by 30.3% and registered at NZ$1.21 billion. Revenue was primarily shredded by COVID-19 uncertainties, challenges encountered by English label infant nutrition channels, and inventory rebalancing in the second half.
• Gross Profit & EBITDA Update: Gross profits slipped by 47.4% to NZ$509.7 million. EBITDA shrunk to NZ$123.4 million, down by 77.6% YoY. Gross margins were registered at 42.3%, reflecting higher COGS, stock write-downs, unfavourable changes in product mix, and unfavourable forex movements.
• Financial Status: Cash position increased marginally to NZ$875.2 million as of 30 June 2021, relative to NZ$854.2 million as of 30 June 2020. The NZ$21 million increase was supported by NZ$80.7 million NPAT contribution and $21.4 million favourable movements in working capital, partially offset by $24.5 million investments in PP&E & intangibles, $39.8 million investment in Synlait, $12.7 million non-cash items, and $4.1 million unfavourable forex movement.

FY21 Financial Snapshot, Analysis by Kalkine Group

Risk Analysis: The growth of Chinese infant nutrition has subdued significantly relative to globally high rates. Cross border trade has been affected substantially due to challenges faced by the global supply chain.

Outlook: Despite continued volatility and uncertainty in A2M’s consumer markets amidst COVID-19, the company manifested confidence in underlying business fundamentals and growth prospects. Current key drivers and vital issues affecting FY22 results shall be China infant nutrition market, category & business divisions, and marketing & capability investment. 

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 ~51.311% in the past year. The stock is currently trading lower than the 52-weeks’ average price level band of $5.040 - $11.750. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low double-digit (in percentage terms). The company might trade at some premium as compared to its peers, considering prudent working capital management for CBEC and daigou/reseller channels in FY21 and a favourable outlook for A2M products, etc. For valuation, peers like Bubs Australia Ltd (ASX: BUB), Australian Agricultural Company Ltd (ASX: AAC), Costa Group Holdings Ltd (ASX: CGC), and others have been considered. Given the growth in Australian milk and Infant-Nutrition-China Label sales in FY21, increased marketing spending in China, the current volatility in the dairy industry, upside indicated by valuation, and current trading levels, we give a ‘Speculative Buy’ recommendation on the stock at the closing market price of $5.560, as of 30 December 2021.

A2M Daily Technical Chart, Data Source: REFINITIV

Synlait Milk Limited

SM1 Details

FY21 Financial Performance: Synlait Milk Limited (ASX: SM1) is engaged in manufacturing, packaging, and commercialising dairy and nutritional products.

• Operating Metrics: In FY21, revenue inclined to ~NZ$1.4 billion, up by NZ$65 million PcP. EBITDA stood at NZ$37.3 million, considerably down by NZ$132 million PcP due to contraction in volume. Net loss for the period stood at NZ$28.5 million, considerably down by the profit of $74.3 million committed in FY20.
• Bottom-Line Factors: Primarily responsible factors for the drained bottom-line are a NZ$55.7 million decline in infant volumes, a NZ$33.3 million decline in stock balancing, and a NZ$20.5 million decline in ingredient performance.
• Cash Flow Status: The period’s operating cash flows eroded to NZ$15.9 million, down by $87.9 million, due to reduced volumes in consumer-packaged infant formula and inventories exceeding target levels by circa 13,000MT.
• Financial Position: Net debt decreased to NZ$479.4 million, primarily due to a NZ$196.1 million equity raise, partially offset by NZ$136.8 million net capex. Investment activities declined to NZ$86.4 million following the Dairyworks and Talbot Forest Cheese acquisitions in FY20.

Operating Metrics FY21, Analysis by Kalkine Group

Key Risks and Challenges: SM1 is exposed to forex movements due to global operations. The substantial reliance on China, trade restrictions and geopolitical tensions may derail growth prospects. Supply chain disruptions and ingredient costs may pose an unfavourable impact on margins.

Outlook

• Financial Guidance: New total debt/EBITDA covenant limit stands at 4.5x for FY22, and SM1 estimates to remain below 4.0x. The working capital facility is expected to renew on 1 October 2022, and the revolving facility will be extended for two years.
• Margin Improvements: SM1 expects improved ingredients margin performance, inventory sell-down, increased Dairyworks contribution and benefits from sale and leaseback of Synlait Auckland.

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 SM1 gave a negative return of ~32.780% in the past year. The stock is currently trading lower than the 52-weeks’ average price level band of $2.640 - $4.970. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight discount as compared to its peers, considering substantial reliance on Chinese market and associated supply chain constraints, etc. For valuation purposes, peers like Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), Tassal Group Ltd (ASX: TGR), and others have been considered. Given the high expectations from margin performance and Dairyworks’ contribution, extention of revolving credit facility, improved ingredients margin performance, current trading levels, volatility sought in the dairy industry, and upside indicated by valuation, we give a ‘Speculative Buy’ recommendation on the stock at the closing market price of $3.220, down by ~1.530%, as of 30 December 2021.

SM1 Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

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: - 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

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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