Bellamy's Australia Ltd (ASX: BAL)

BAL Details

Moving up on ASX: Bellamy’s stock has moved up about 1.7% on October 17, 2017 with improving sentiments post the release of a recent positive market update. Further, Morgan Stanley and its subsidiaries have become a substantial holder in the group with 5.4% voting power. Mitsubishi UFJ Financial Group has also taken interests in the group while becoming a substantial holder with 5.4% voting power.

The group recently updated its August guidance at the back of encouraging early results in FY18 and now expects to achieve the target of 15-20% revenue growth (upgraded from 5-10%); and 17-20% EBITDA margin (upgraded from 15-20%) in FY18. This guidance excludes the Camperdown business that has been anticipated to generate an EBITDA loss of $1m to $2m. 1H18 revenue is also expected to be higher than 2H18 revenue basis the impact of seasonality and a delay in CFDA registration resulting in all ‘Chinese label’ sales occurring in 1H18. Despite this positive update, challenges including CFDA registration prevail while the group aims to demonstrate better performance going forward with measures being adopted to mitigate these challenges. We maintain a “Hold” on the stock at the current price of $11.19 

Expenses (Source: Company Reports) 

a2 Milk Company Ltd (ASX: A2M)

A2M Details

Support from financial performance and strong product sales: The a2 Milk Company’s stock rallied 2.5% on October 17, 2017 while the group has been focussing on expanding its nutritionals platform. The group had witnessed a 56% growth in FY17 total revenues over the prior corresponding period (pcp) while earnings of 159% led to increased earnings to sales margin. The group’s net profit after tax was seen to surge 198% ahead of the pcp. Overall, the group has been benefitting from strong growth in sales and market share for a2 Platinum® infant formula in Australia and China, with investment in building brand awareness in the United States paying well. The group has lately updated that Synlait (in which A2M has substantial equity interests) has received registration that will allow the company to continue the export of China label infant formula to China. For US, the company has updated its financial outlook to include investment of approximately US$25 million over the course of FY18 and FY19 before positive monthly EBITDA in FY20. Meanwhile, Challenger Ltd and its entities are noted to have recently ceased to be a substantial holder in the group (interest reduced from 5.51% to 4.98%). Given the already high run-up in the stock that is now trading at an unreasonable price to earnings level, we put an “Expensive” recommendation at the current price of $7.18

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