Bellamy's Australia Limited

Factors Impacted Net Revenue:Bellamy's Australia Limited (ASX: BAL) is a producer and distributor of branded food product. It has a market capitalisation of A$927.35 Mn as on 13^th September 2019. Recently, the company announced that JPMorgan Chase & Co and its affiliates have made a change to their substantial holdings in the company and the current voting power stood at 7.76% while previous voting power was 6.71%.  In the release of FY19 results, the company announced that China demand was impacted by regulatory change, a lower birth rate and increased competition. The Company’srebrand represents the most significant investment in its history and has delivered a truly premium brand and product, which includes a world leading level of DHA for organic formula. The company reported net revenue amounting to $266 Mn in FY19, which was mainly impacted by loss of $18 Mn in China label sales (vs FY18), CBEC regulatory changes, intense competition, and rebrand transition. 


Group Revenue and Normalised EBITDA (Source: Company Reports)

What to Expect:For FY20, the company expects group net revenue growth in the range of 10%-15% at an EBITDA margin consistent with last year, with revenue growth expected to accelerate in 2H FY20 with new product launches. BAL remains confident in its growth strategy and medium-term revenue target of $500 million but has deferred this target beyond FY21 given the ongoing SAMR registration process.

Stock Recommendation:The company has witnessed continued gross margin expansion to 43.5% in FY19 in comparison to 39.2% of FY18 beyond functional product upgrades, including the addition of DHA and GOS across formula range.The company possesses a strong balance sheet and cash conversion, which supports its growth agenda with $112.4 Mn in net cash. The current ratio of the company stood at 3.32x in FY19 against the industry median of 1.35x. This implies that BAL is in a decent position to address its short-term obligations as compared to the broader industry. On the stock’s performance front, it produced negative returns of 12.23% and 20.97% in the time span of one month and six months, respectively. Currently, the stock is trading below the average of 52 weeks high and low levels of $11.960 and $6.710, respectively, proffering a decent opportunity for accumulation. Therefore, in light of above-stated facts and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of A$8.320 per share (up 1.711% on 13^th September 2019).

 

The A2 Milk Company Limited

Decent fundamentals: The A2 Milk Company Limited (ASX: A2M) is engaged in producing, marketing and selling branded dairy and infant formula products in targeted global markets. It has a market capitalisation of ~A$9.7 Bn as on 13^th September 2019. Recently, the company announced that UBS Group AG and its related bodies corporate has become an initial substantial holder in the company with the voting power of 5.03%.  In FY19, the company reported record financial results with continuing strong momentum. It reported total revenue amounting to $1,304.5 Mn, reflecting a rise of 41.4% and posted a net profit after tax of $287.7 Mn with a rise of 47.0%.

During FY19, the company invested in expanded Kantar market share coverage to include city tiers B, C and D. The picture is important for the investors as it gives a broad overview of the key financial numbers:

 
Financial Charts (Source: Company Reports)

Future Guidance:It expects continued growth in revenue throughout its key regions supported by increasing brand and marketing investment in China and the US. It added that full year FY20 EBITDA as a percentage of sales is anticipated to be broadly consistent with 2H FY19 EBITDA margin of 28.2% reflecting (1) increased full-year marketing investment to around 12% of sales, and (2) continued investment in organisational capability for supporting future growth.Further, gross margin percentage is expected to be broadly consistent with FY19.

Stock Recommendation: In the financial year 2019, the company has invested strongly in both internal and external capability. Coming to the stock’s recent performance, it has delivered the returns of -13.79% and -5.24% in the time span of one month and three months, respectively. Currently, the stock is trading slightly below the average of 52 weeks high and low levels of $17.30 and $8.14, respectively. Its 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 than its peer group. Moreover, itreported a higher Price to Cash Flow multiple of 35.0x and P/E multiple of 35.15x on TTM basis as compared to the industry median of 4.6x and 6.6x, respectively showing that the stock is overvalued.Hence, considering the aforesaid facts coupled with stretched valuations and current trading levels, we suggest investors to take a wait and watch stance on the stock at the current market price of $13.080 (down 0.834% on 13 September 2019).

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