The A2 Milk Company Limited

China’s E-Commerce Announcement: The A2 Milk Company Limited (ASX: A2M) is engaged in the selling, producing and marketing of branded dairy and infant formula products in targeted global markets. The market capitalisation of the company stood at ~A$11.92 Bn as on 22nd July 2019. Recently, the company via a release stated that UBS Group AG and its related bodies corporate have ceased to be a substantial holder in NZX Limited and The A2M Milk Company Limited on 9th July 2019. On 21st June 2019, A2M updated the market about the announcement made by China’s SAMR (State Administration of Market Regulation) and other ministries and bureaus highlighting the successful implementation of e-commerce legislation related to all goods and services transacted via e-commerce platforms, which became effective from April 2019.

As per the release, the announcement consists of (1) to increase the focus on supervision and enforcement of the e-commerce legislation, and in the process, standardise e-commerce business practices, (2) to enhance the integrity of the digital market trading environment, and (3) to maintain a good e-commerce market order.It was also mentioned that the announcement also references an intention to ensure that no counterfeit product is being transacted via all e-commerce platforms, which includes social e-commerce and cross-border e-commerce channels. The following picture gives an idea of the company’s basic EPS:


Basic EPS Trend (Source: Company Reports)

What to Expect:  The company stated that it invested strongly in 1H in internal and external capability. A2M continued its investment in 2H and this rate of investment would continue in FY20. After a very strong performance in 1H FY19, and encouraged by its increased market share in China, A2M is reinvesting the benefits of scale into increased marketing activities in 2H. It is also expecting that the 2H EBITDA margins would consequently be lower in comparison to its 1H. Resultantly, it is expecting FY19 EBITDA as a percentage of sales to be around in the range of 31%-32%. This is mainly because of marketing investment in the second half of FY19 to approximately double as compared to 1H FY19, its continued investment in building organisational capability, and a slightly weaker Australian Dollar (vs. New Zealand dollar).

Stock Recommendation:  It posted a net margin of 24.9% in 1H FY19 as compared to the industry median of 8.3%. This implies that A2M is effectively converting its topline into the bottom line. Coming to the stock’s performance, it produced returns of 18.91% and 7.49% in the time span of one month and three months, respectively. As per ASX, the stock is trading closer towards 52-week higher level of $16.480 with high PE multiple of 50.42x. Hence, considering the above-stated facts and current trading level, we give an “Expensive” recommendation on the stock at the current market price of A$ 16.420 per share (up 1.233% on 22^nd July 2019).
 

Wattle Health Australia Limited

Update on Supply Agreement:Wattle Health Australia Limited (ASX: WHA) is a small cap food processing company with the market capitalisation of A$90.44 million as of 22^nd July 2019. Recently, the company, via a release updated the market about its supply agreement with Vasudevan and Sons Exim Private Limited (VSEP). The company previously entered into the agreement with VSEP in India for the supply of WHA’s natural baby food range. However, the company’ s registration of product has been completed in India and as a consequence the company has demanded VSEP provide its bank guarantee and to comply with the VSEP Supply Agreement.

The company further added that Vasudevan and Sons Exim Private Limited has not yet provided the full amount of the bank guarantee and VSEP is in breach of the VSEP Supply Agreement.In addition, the company has commenced legal action in India against Vasudevan and Sons Exim Private Limited for protecting its commercial interest and with a view to recovering losses. WHA received a deposit of A$100,000 from VSEP in December 2018, which is not refundable under the VSEP Supply Agreement.

In another update, the company inked revised debt facility term sheet in order to increase proposed net cash funding amounting up to US$85 million with Gramercy Funds Management LLC on behalf of its managed vehicles and funds.The company is also negotiating to increase its shareholding interest in Blend & Pack to 93.5%.

The company would be the sole funder for Corio Bay Dairy Group Ltd for the construction of Australia’s first dedicated organic nutritional spray dryer.The company further added that after the conclusion of acquisition, the company would be one of the first fully vertically integrated organic nutritional dairy companies in Australia. In the quarter ended on 31^st December 2018, the net cash used in the operating activities stood at A$5,205,616.


Cash Flow Statement (Source: Company Reports)

Future Aspects: The company is expecting dairy sales in China to increase by US$1.8Bn by 2021, which would be fueled by infant formula. The dairy has been predicted to be the fasted growth category from 2016 to 2021. The current ratio reported by the company of 12.94x in 1H FY19 in comparison to the industry median of 1.42x. This indicates that the company is in a sound position to address its short term obligations.

Stock Recommendation: Talking about the past performance the stock, there were returns of -13.89% and -37.16% in the time span of one month and three months, respectively. As per ASX, the company’s stock is trading closer to its 52-week lower level of $0.455 and, thus, it can be said that there is a decent opportunity to make an entry. Hence, considering the aforesaid parameters and current trading level, we give “Speculative Buy” recommendation on the stock at the current market price of A$0.475 per share (up 2.151% on 22^nd July 2019).  

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.