The A2 Milk Company Limited

A2M Details

Removal from S&P/ASX 50 Index: The A2 Milk Company Limited (ASX: A2M) is a nutritional dairy company that commercialises A2 protein type branded milk and related products in Australia, New Zealand, China, other Asian countries, and the United States. S&P Dow Jones Indices recently notified that A2M will be removed from S&P/ASX 50 Index from 20 September 2021. The company has recently issued 7,551 fully paid convertible shares at a considerable price of A$5.83.

FY21 Financial Performance Highlights:

• The company has recorded a decline in its revenue by 30.3% to NZ$1,206.7 million in FY21, compared to $1,731.1 million in FY20. The decline in revenue was due to COVID-19 challenges experienced in the English label infant nutrition channels.
• The Australian liquid milk revenue increased by 10.8% YoY to NZ$169.0 million.
• The company has reported a 77.6% decline in EBITDA to NZ$123.4 million in FY21 against NZ$552.0 million, including the cost of the Mataura Valley Milk (MVM) acquisition.
• A2M has reported a decline of 79.1% in net profit to NZ$80.7 million in FY21 versus NZ$385.8 million, reflect a higher effective tax rate than FY20.
• The strong cash balance as of 30 June 2021 was NZ$875.2 million, which strengthen the capacity to invest in growth opportunities.

 Cash and Cash Equivalent (Source: Analysis by Kalkine Group)

Key Risks: The company has a significant impact on its key financials, marketing, investment capability due to the impact of the COVID-19 pandemic and rapidly changing dynamics in China and expected that it might affect in FY22. The company is also exposed to the risks of demand and supply volatility, which could cause material excess inventory issues.

Outlook:

• The company focuses on packaging, investing, engaging, supporting local communities and the ethical supply chain in FY22.
• The management is confident in the underlying fundamentals of the business, growth opportunity in core market is strong and expecting a positive outlook in long-term.
• The company is focused on product innovation, category expansion, targeting a new market and increasing brand investment to drive demand that might enable it to return to growth in the medium-term.
• A2M continues to reduce distributor inventory levels which will impact sales, which could have a stronger result in H2FY22.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the Company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks

Stock Recommendation: As per a recent announcement, the company has strategically partnered with China Animal Husbandry Group by acquiring 75% interest in MVM. The stock of A2M is trading below its average 52-weeks' levels of A$5.040-A$17.240. The stock of A2M gave a negative return of ~5.36 % in the past one month and a negative return of ~66.16% in the past one year. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium to its peers' average, considering an increase of revenue in the Australian segment and a lower debt-to-equity ratio. For the purpose of valuation, peers such as Murray Cod Australia Ltd (ASX: CLV), Beston Global Food Company Ltd (ASX: BFC), Clover Corporation Ltd (ASX: CLV) have been considered. Considering the current trading levels, indicative upside in valuation, strong balance sheet, strategic investment, increase in brand investment, optimistic outlook, we recommend a ‘Buy' rating on the stock at the current market price of A$5.610, as on 6 September 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

A2M Daily Technical Chart, Data Source: REFINITIV 

Synlait Milk Limited

SM1 Details

Appointment of Company’s Director: Synlait Milk Limited (ASX: SM1) engages in manufacturing, packaging, and commercialising of dairy and nutritional products that include cheese, butter, ice cream, milk powder, infant and adult nutritional powders etc., globally. As per a recent update, the company has appointed Nigel Macdonald as its Director, Operations.

H1FY21 Financial Performance:

• The company has recorded an increased unaudited revenue of NZ$664.2 million in H1FY21, compared to NZ$559.3 million in H1FY20, driven by Dairy works, supported by strong Global Dairy Trade pricing, offset by consumer-packaged infant formula volumes.
• The company has reported a decline in EBITDA by 29% to NZ$47.7 million in H1FY21 from NZ$67.6 million in H1FY20, due to a reduction in infant base powder production.
• The company has incurred a loss of NZ$6.373 million in H1FY21 against NZ$26.196 million in H1FY20. The impact of COVID-19, and ongoing recovery of our key customer, had a significant impact on company’s production and profitability.

Cash and Cash Equivalent Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Foreign Currency Risk- The company’s operations are exposed to the global market, due to which the company could face the foreign currency risk.
• Impact of COVID-19 pandemic- The company’s activities were delayed due to the COVID-19 outbreak in the region resulting in widespread lockdowns and travel restrictions, and still, the uncertainty prevails.

Outlook: The company's continuous support and work constructively with the syndicate to ensure it has the appropriate funding for FY22 and further achieved a waiver of relevant covenants in FY21. The company has advised to announce the full-year result of FY21 before 27 September 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the Company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of SM1 is trading below its average 52-weeks' levels of A$2.640-A$5.720. The stock of SM1 gave a negative return of ~3.07% in the past one week and a negative return of ~44.93% in the past one year. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount to its peers' average EV/Sales (NTM trading multiple), considering the uncertainty of the COVID-19 pandemic and lower gross margin. For the purpose of valuation, peers such as Bega Cheese Ltd (ASX: BGA), Inghams Group Ltd (ASX: ING), Tassal Group Ltd (ASX: TGR) have been considered. Considering the current trading levels, indicative upside in valuation, decent balance sheet, increase in revenue, optimistic outlook, and the key risks associated with the business, we recommend a ‘Speculative Buy' rating on the stock at the current market price of A$3.040, down by ~2.876% as on 6 September 2021.

SM1 Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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