The A2 Milk Company Limited

A2M Details

Robust Balance Sheet: The A2 Milk Company Limited (ASX: A2M) is engaged in the commercialization of a2MC branded milk and related products. The Company operates through four segments, which include Australia and New Zealand; China and other parts of Asia; the UK, and the USA. The company's portfolio composition includes liquid milk, infant formula and others. The company's brands include a2 Milk and a2 Platinum. A2M has posted a closing cash balance of NZ$774.6mn as of 30 December 2020. A2M has reported an increase in its working capital by NZ$147.0mn due to an increase in inventory and a reduction in accounts payable. The company has utilized its cash reserves for the acquisition of MVM and KyValley milk processing facility.

Strong Growth for Liquid Milk: The company has posted revenue growth of 16.3% YoY for ANZ liquid milk to NZ$86.9mn in 1HFY21. The company has also witnessed an increase of 107% revenue growth from China to NZ$3.7mn and an increase of 21.8% in revenue growth for the USA to NZ$34.1mn. Australia has achieved a record market share of 11.7%. A2M has expanded its reach in the US through an increased number of stores by the end of December 2020.

Liquid Milk Growth (Source: Company Reports)

Outlook: A2M continues to invest in its brands to achieve long term growth. Due to higher brand investment, lower revenue, longer support to Daigou, movements in foreign currency and adverse channel mix, the company is expecting a lower EBITDA margin. The company is expecting a revenue of NZ$1.4bn for FY21 and an EBITDA margin in a range of 24%-26%. A2M has plans to support the Daigou/resellers to drive distribution innovation for 2HFY21. 

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

*% 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.

** 1 AUD = ~0.94 NZD 

Stock Recommendation: In the last one month, A2M has corrected by 15.66% and 35.32% in the last three months on ASX. The stock is currently trading below the average 52-week price level range of $8.33-$20.050. On the technical analysis front, the stock has a support level of ~$8.21 and a resistance of ~$10.658. We have valued the stock using P/E based multiple relative valuation method and have arrived at a target price of lower double-digit upside (in % terms). We believe that the company might trade at a slight discount as compared to its peer median, considering a submissive guidance for FY21 revenues from the management in the short-term. For the purpose, we have taken peers Beston Global Food Company Ltd (ASX: BFC), Bubs Australia Ltd (ASX: BUB), Bega Cheese Ltd (ASX: BGA) and more. Considering a long-term positive outlook, strong growth in liquid milk across the regions, valuation, and current trading level, we give a “Hold” rating on the stock at the current market price of $8.99, increased by 2.62% as on 26 February 2021.

A2M Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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