Stocks’ Details

The A2 Milk Company Limited

Acquisition of Mataura Milk Valley: The A2 Milk Company Limited (ASX: A2M) is engaged in the sale of branded products in targeted markets made with cow milk which produce milk naturally containing only the A2 protein type. The market capitalisation of the company stood at $8.19 billion as on 24^th December 2020. Recently, the company has reached a binding agreement for the acquisition of a 75% stake in Mataura Valley Milk, which is a dairy nutrition business, located in Southland, New Zealand. The company would pay a total consideration of NZ$268.5 million and is likely to be completed on 31^st May 2021 along with approval from the New Zealand Overseas Investment Office. The company added that the acquisition will be undertaken on a debt-free cash-free basis and would be financed through the existing cash reserves. This acquisition is likely to provide an opportunity to participate in nutritional products manufacturing, supplier and geographic diversification, and bolster its relationship with key partners in China.

Growth in Top-Line and Bottom-Line: During FY20, the company experienced decent growth in revenue and earnings, with strong performances in all key product segments, across all core markets. For the year ended 30^th June 2020, the company reported total revenue amounting to $1.73 billion, reflecting a rise of 32.8% over pcp. Net profit after tax for the year amounted to $385.8 million, which soared by 34.1% over pcp. In addition, the company witnessed strong growth in China label infant nutrition, which resulted in the doubling of sales to $337.7 million.

Revenue Growth (Source: Company Reports)

Guidance: The company expects to report revenue of $670 million in 1H F21, and for FY21, A2M anticipates revenue in the range of $1.40 billion to $1.55 billion. In addition, EBITDA margin for 1H FY21 and FY21 is likely to be 27% and 26%-29%, respectively.

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company closed FY20 with a strong balance sheet supported by a cash balance of $854.2 million. In the last one month and three months, the stock has corrected 18.93% and 33.51%, respectively. The stock is trading towards its 52-week low level of $9.820We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price, which is offering an upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as Wesfarmers Ltd (ASX: WES), Blackmores Ltd (ASX: BKL), and Bega Cheese Ltd (ASX: BGA). On a technical front, the stock has a support level of $9.178 and a resistance level of $15.041. Therefore, considering, the decent growth in top-line and bottom-line, healthy balance sheet, updated guidance, current trading level and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $10.950 per share, down by 0.726% on 24^th December 2020.

Metcash Limited

Decent Sales Growth in All Pillars: Metcash Limited (ASX: MTS) is a wholesaler to independent retailers in the food, grocery, liquor, hardware and automotive industries. The market capitalisation of the company stood at ~$3.52 billion as on 24^th December 2020. For the half-year ended 31^st October 2020 (1H FY21), the company recorded decent growth in sales volumes through all Pillars, which were supported by the company’s investment in MFuture initiatives. Excluding charge-through sales, MTS earned a revenue of $7.1 billion, reflecting a rise of 12.2%. In addition, EBIT for the half-year amounted to $203.0 million, indicating an increase of 30.4% over 1H FY21. Moreover, higher sales volumes and an improvement in the contribution from joint venture stores has supported growth in EBIT of food segment.

Key Financials (Source: Company Reports)

Outlook: The company is well-placed to fulfil the expected strong demand coming mainly from South Australia. In addition, it had commenced 2H FY21 with rising sales momentum in all Pillars in the first five weeks of 2H FY21.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: For 1H FY21, the company has resolved to pay a fully franked interim dividend of 8.0 cents per share on 29 January 2021. MTS ended 1H FY21 in a net cash position of $172.5 million. The stock of MTS has provided a return of 18.1% in the last three months. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price with an upside of high single-digit (in percentage terms). For the purpose, we have taken peers such as Harvey Norman Holdings Ltd (ASX: HVN), JB Hi-Fi Ltd (ASX: JBH), and Elders Ltd (ASX: ELD), to name few. On a technical analysis front, the stock has a support level of ~$2.881 and a resistance level of ~$3.627. Thus, considering the decent return in the past months, sales growth in all pillars, cash-rich business, we give a “Hold” recommendation on the stock at the current market price of $3.430 per share, down by 0.580% on 24^th December 2020.

Inghams Group Limited

Sale of NZ Dairy Nutrition Business: Inghams Group Limited (ASX: ING) is engaged in the production and sale of chicken and turkey products. The market capitalisation of the company stood at ~$1.16 billion as on 24^th December 2020. On 18^th December 2020, the company has reached an agreement with SunRice Group for the sale of its Hamilton New Zealand feed mill and associated New Zealand dairy feed supply business for consideration of around NZ$11.5 million, and it is likely to be finished by the end of March 2021. In addition, the company is not expecting any material impact on earnings in FY21 from this transaction. Poultry demand has increased for the company, with trading volumes up by 6.3% to 110.9 kt in 1QFY21 (Y-o-Y) and 7.5% (Q-o-Q). Core poultry volume sales have increased during the quarter and were near pre-COVID-19 levels. ING’s inventory levels were down by $16 million in the first 17 weeks of FY21.

Underlying revenue increased to $2,555.3 million in FY20, from $2,478.8 million in FY19. However, underlying NPAT decreased by 24% to $78.8 million in FY20, owing to an uncertain trading environment given the COVID-19 disruption. There was an improvement in performance in 2H FY20, despite COVID-19 restrictions and gross margin related costs.

Core Poultry Volume (Source: Company Reports)

Outlook: The company has made progress to reduce the inventory level caused by COVID-19 disruption. It is looking to further reduce the inventory by the end of FY21, aided by Christmas demand. The company expects to benefit from the planned feed cost reductions in 2H FY21.

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has recently upgraded its dividend policy in the range of 60% to 80% of Underlying Net Profit After Tax (NPAT) from prior target payout range of 60% to 70%. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with correction of high single-digit (in percentage terms). On a technical analysis front, the stock has a support level of ~$3.055 and a resistance level of ~$3.249. Thus, considering the high debt to equity and valuation, we are of the view that most of the positive factors have been discounted at current trading levels. Hence, we suggest investors to book profit amid the current volatility and give an “Expensive” rating on the stock at the current market price of $3.150 per share, up by 0.318% on 24^th December 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters), Comparative Chart Time: Close to Market Hours

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