The A2 Milk Company Limited

Strong Revenue Growth in 1HFY19: The A2 Milk Company Limited (ASX: A2M) posted a decent set of 1HFY19 results wherein it recordedstrong revenue growth of 41.0% to $613.1 million in H1 FY19 against the prior corresponding period. It was mainly driven by the product mix growth across all the key regions during the same period. NPAT stood at $152.7 Mn in 1HFY19, exhibiting robust growth of 55% on PCP basis.


Results Highlights- 1H19 (Source: Company Reports)
 
The strong results highlighted continuing strong growth across key regions. Gross margin stood at 56.6% in 1HFY19, representing strong growth of 577 bps on a Y-o-Y basis due to the benefit of scale and mix. This was partially offset by currency movements- most notably a weaker Australian dollar. The cash in hand of the company remained strong in 1HFY19 with $287.9 million, which reflects a strong NPAT contribution, offset by inventories in Synlait.

The company is well supported by its strategic supply partners, Synlait and Fonterra.  Synlait provides foundation infant nutrition partnership, exclusive supply rights for infant nutrition into ANZ and China.  Fonterra, on the other hand, has exclusive supply rights for infant formula and other products into the markets. It has emerging markets and multi-product partnership, along with the capacity to support future growth with the development of milk pools in Australia and New Zealand.

Guidance for FY2019-2020: As per the company guidance, second half EBITDA margins will consequently be lower than the first half, with full year FY19 EBITDA as a percentage of sales expected to be approximately 31-32%. Moreover, the group revenue in the second half of FY19 is expected to grow at a pace, which is broadly in line with the first half growth. The increased brand and marketing investment is expected to continue into FY20. Any significant impact to gross margin during FY19 due to the recent increase in dairy prices as reflected in the Global Dairy Trade Indices is not anticipated, however, some impact to the gross margin percentage is expected in FY20.  

The stock’s return remained volatile over the short-term with 29.44% and -12.58% returns over the past six months and one-month period respectively. Currently, the stock is trading slightly towards its 52-week high range with higher PE multiple of 41.68x. Given the mix scenario, we have a wait and watch view on the stock at the current market price of A$13.640 per share (up 1.715% on 19 June 2019).
 

Bellamy’s Australia Limited

Robust Balance Sheet: Bellamy’s Australia Limited (ASX: BAL) is into the production of organic food for babies. The company’s products include milk powder, cereal, pasta, porridge, and snacks. The company was founded in the year 2004.


Group 1H19 financial performance compared to 1H18 (Source: Company Reports)
 
Form the financial standpoint, the normalised revenue decreased by 25.9% to $129.6 Mn in 1HFY19 against the prior corresponding period. Itwas mainly impacted by several factors such as delayed SAMR registration, a planned reduction in trade inventory prior to the rebrand, and observed a slowdown in category performance. Moreover, thecompany maintained its strong balance sheet position with the group cash increasing to $95 million, nil debt status, and continued access to a $40 million working capital debt facility. The cash conversion during the period was impacted by cyclical phasing of creditor payment cycles, structural changes in the supply chain as a result of direct sourcing strategy.
 
The company has traditionally maintained ambitious investment on rebranding. The launch investment included trade inventory reduction through run-down of trade inventory by ~$10 million in 1H19 prior to the transition to ensure clean change-over and improved channel economics. The company is planning to double the marketing spend in 2H19. The increase in Chinese sales and marketing team in 2H19 will activate the brand. The one-off inventory write-down of ~$12 million in 1H19 provides for all remaining legacy inventory.
 
Revenue & EBITDA Guidance: The company expects the revenue for FY19 to be within a range of $275-300 million, allowing for slower trading prior to the rebrand and during the lunar new year holiday with an expected return to stronger performance from March. Normalised EBITDA for the group is expected to be within a range of 18-22% of revenue. The medium-term outlook of the company remains good, on the back of category fundamentals, differentiated position, and an aggressive three-year growth strategy targeting over $500 million revenue by FY21.     
 
The stock yielded a YTD return of 4.08 %. With decent balance-sheet position, platform for new level of growth and investment, and branding, but erupting challenges as understood from market in China, we believe the company needs to strengthen the lost confidence. Hence, we maintain our “Hold” recommendation on the stock at the current market price of $8.000 per share (up 1.266% on 19 June 2019).
 

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