The A2 Milk Company Limited

A2M’s Share Surged ~11% Over Positive Outlook for FY20:The A2 Milk Company Limited (ASX: A2M) is involved in the sale of branded products made with milk from cows that produce milk containing only A2 protein type. Recently, substantial holding of Pendal Group Limited in the company increased from 5.26% to 6.27%. In addition, Morgan Stanley and its subsidiaries became substantial holder in the company with stake of 5.535%.

In another update, Synlait and A2M agreed to extend supply agreement for a2 Platinum® and other nutritional products, for a minimum term of five years (till July 31, 2025), with a rolling three-year term from August 1, 2020. The agreed variation was approved by NZX Regulation who have waived Synlait’s requirement to obtain shareholder approval under listing rule 5.1.1 and 5.2.1.

FY19 Financial Highlights for the period ended June 30, 2019: Total Revenue for the period was reported at NZ$1,304.5 Mn, representing an increase of 41.4% on the previous year. EBITDA for the period was reported at NZ$413.6 Mn, representing an increase of 46.1% on the previous year. Net profit after tax for the period stood at NZ$287.7 Mn, up 47.0% on pcp. Basic Earnings per share (EPS) amounted to 39.3 cents, up 45.4% on the previous year.

 

FY19 Key Metrics (Source: Company Reports)

What to Expect:The company expects continued strong revenue growth across its key regions supported by brand and marketing investment in China and the US. FY20 EBITDA margin is expected to be in the range of 29-30% with gross margin benefiting from improved price yield and reduction in COGS. Revenue for H1FY20, has been estimated to be in the range of $780 Mn to $800 Mn. EBITDA margin for H1FY20 is expected to be in the range of 31-32%.

Stock Recommendation:A2M’s shares generated a positive YTD return of 15.58%. Its gross margin, EBITDA margin and net margin for FY19 stood at 54.7%, 32.3% and 22.1%, better than the industry median of 38.7%, 12.5% and 5.5%, respectively, implying decent fundamentals for the company. ROE for FY19 stood at 42.8%, better than the industry median of 12.8%, implying decent return for the shareholders for FY19. Current ratio for FY19 stood at 3.29x, better than the industry median of 1.35x, which implies that the company is in a better position to address its short-term obligations. Hence, considering the company’s decent top-line and bottom-line performance, impressive profitability margins, net cash position, optimistic outlook, and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $13.370, up 11.231% on November 19, 2019, taking cues from the Annual General Meeting 2019 and extended supply agreement between Synlait and A2M.
 

Bellamy’s Australia Limited

BAL’s Share Trading Close to 52-Week High Levels:Tasmanian Food Major, Bellamy’s Australia Limited (ASX: BAL) offers a range of organic food and formula products for babies and toddlers. The company recently updated that the voting power of UBS Group AG reduced from 6.41% to 5.14%. On November 15, 2019, BAL informed the market that Foreign Investment Review Board (FIRB) has provided written notice to China Mengniu Dairy Company Limited that the Commonwealth has no objection to the proposed acquisition of Bellamy's by a wholly owned subsidiary of Mengniu, by way of a scheme of arrangement.The implementation of deed, however, would be subject to the shareholders’ approval.

FY19 Key Highlights for the period ended June 30, 2019: The company’s normalised revenue for the period was reported at $266.2 Mn, as compared to $328.7 Mn in the previous year. This can be attributed to the loss of Chinese-label sales of $18.2 Mn due to company’s State Administration for Market Regulation (SAMR) brand application process at Camperdown. Moreover, increased competition within the organic segment and lower prevailing birth rate in China, were other factors impacting revenue.  Normalised EBITDA for the period was reported at $46.9 Mn as compared to $70.6 Mn in the previous year. Normalised NPAT for the period was reported at $30.1 Mn as compared to $47.0 Mn in the previous year.


FY19 Key Metrics (Source: Company Reports)

What to Expect: Group’s net revenue growth for FY20 is expected at 10% - 15% at an EBITDA margin consistent with last year. Revenue growth in the second half of FY20 is expected to accelerate due to several product launches, investment in marketing and China capability. The company has deferred its medium-term target of $500 Mn revenue beyond FY21, due to ongoing SAMR registration process.  

Stock Recommendation: The stock of the company generated a YTD return of 73.39%. Currently, it is trading close to its 52-week high of $13.220. Its EBITDA margin and net margin for FY19 stood at 17.6% and 8.1%, better than the industry median of 12.5% and 5.5%, respectively, implying decent fundamentals of the company. However, looking at the valuation, the stock is trading at EV/Sales and EV/EBITDA multiples on TTM basis at 5.0x and 28.2x, higher than the industry median of 1.8x and 8.5x, respectively, indicating overvalued position at the current juncture. Considering the above scenario, we give an “Expensive” rating on the stock at the current market price of $13.170, up 0.076% on November 19, 2019.

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