The A2 Milk Company Limited

A2M Announces Issue of Shares Under New Equity Programs: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, the company announced that it has issued 9,968 ordinary shares to certain employees under two new equity programs, i.e., Gift Offer, comprising issue of 3,652 ordinary shares and Share Match Program, comprising issue of 6,316 ordinary shares.

In another update, UBS Group AG and its related bodies became a substantial holder in the company with a stake of 5.02%, effective October 15, 2019.

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, an increase of 46.1% on the previous year. Net profit after tax for the period stood at NZ$287.7 Mn, an increase of 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 revenue growth across its key regions, underpinned by increasing brand and marketing investment in China and the US. Full year FY20 EBITDA margin has been anticipated to be broadly in-line with H2FY19 EBITDA margin, with an increase in full-year marketing investment to ~12% of sales and continued investment in organisational capability to support future growth.

Stock Recommendation:A2M’s shares generated negative returns of 1.64% and 30.06% over a period of 1 month and 3 months, respectively. 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.Top-line and bottom-line have improved significantly over the previous year. Revenue from the US market grew substantially with the increase in distribution stores to 13,100, whereas revenue growth in the Australian market was reported at 10.7% with 11.2% market share. Moreover, the company is planning to make further investment in brand and marketing to drive revenue growth across key regions. Given the backdrop of above factors, we suggest investors to adopt a wait and watch stance on the stock at the current market price of $11.990, up 0.251% on October 30, 2019.
 

Bellamy’s Australia Limited

Revenue for FY19 Decreased By ~19% On Previous Year:Tasmanian Food Major, Bellamy’s Australia Limited (ASX: BAL) offers a range of Organic food and formula products for babies and toddlers. As per a recent announcement, Credit Suisse Holdings (Australia)Limited ceased to be a substantial shareholder of the company.

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 68.77%. 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/EBITDA multiple of 27.6x, which is higher than the industry median of 8.8x. Currently, the stock is trading close to its 52-week high level of $13.030 and has a Price to Earnings multiple of 65.660x. Considering the above scenario, we give an “Expensive” rating on the stock at the current market price of $12.750, down 0.468% on October 30, 2019.

 

Wattle Health Australia Limited

WHA’s Shares Continue to be in Suspension:Wattle Health Australia Limited (ASX: WHA) is involved in constructing Australia’s first dedicated organic nutritional spray dryer. The company recently announced that the 2019 Annual General Meeting will be held on 27 November 2019. On October 2, 2019, the company informed the market about the suspension of its stock under listing rule 17.2 at its request, due to pending release of the proposed acquisition announcement. On September 23, 2019, the company responded to the ASX query regarding a huge spike in its share price from $0.57 to $0.74, along with a significant increase in the volume. WHA highlighted that China Mengniu Dairy Company Limited will acquire 100% of the issued share capital of Bellamy’s Australia Limited (ASX: BAL) via a scheme of the arrangement, which has generated a considerable market interest for the company and has created a positive impact in the sector overall. The company also highlighted that it is finalising the proposed acquisition of CNCA accredited manufacturing facility, Blend and Pack, which was approved by the shareholders at the Extraordinary General Meeting on July 31, 2019.

FY19 Key Highlight for the period ended June 30, 2019:Sales revenue for the period was reported at $795,000 as compared to $1,441,000 in the previous year. This can be attributed to discontinuation of the conventional nutritional dairy product range, to be replaced by the Company's organic product offering, which will be due in market in the first quarter of FY20.

Net assets of the company decreased from $61,539,000 in FY18 to $51,438,000 as on June 30, 2019. Company’s current assets less current liabilities decreased by $26,324,000 to $29,029,000, mainly due to the expenditure of funds raised during the previous financial year on construction of the consolidated entity's organic dairy spray plant, cash payments for non-current assets, and operating costs.


FY19 Income Statement (Source: Company Reports)

What to expect:FY19 has been a challenging period for the company as it undertook various measures to become one of the only vertically integrated organic nutritional dairy company in the world and to capitalize on the fastest growing dairy segment both domestically and internationally. A strong balance sheet position backed by a substantial amount of net assets and cash at bank is expected to support the future growth strategy of the company.WHA’s shares last traded at $0.530 on 27 September 2019.

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