Stocks’ Details

The A2 Milk Company Limited

Strong Performance in All the Key Product Segments: The A2 Milk Company Limited (ASX: A2M) is primarily involved in the sale of branded products made with milk from cows that produce milk naturally containing only the A2 protein type. In a recent update, the company announced that UBS Group AG and its related bodies corporate, a substantial holder of the company, has reduced its voting power from 5.05% to 4.95%.

Future Expectations: The company is anticipating continued growth in its Mother & Baby Stores (MBS). Despite the significant uncertainty and instability in market conditions led by COVID-19 pandemic, the company has provided guidance for FY21 and expects revenue in the range of NZ$1.80 billion to NZ$1.90 billion and group EBITDA margin of ~31%. The company may also experience some disruptions in its daigou channel in the first half of FY21 and expects 1HFY21 revenues to be in the ambit of NZ$725 million to NZ$775 million. 

FY20 Key Highlights: During FY20, the company has achieved significant growth in China and is likely to witness additional opportunities in North America and other parts of Asia. During the year, it made significant gains in revenue and earnings, with strong performance in all key product segments and across all core markets. The overall result for FY20 reflects continued growth in its infant nutrition segment with sales of NZ$1.42 billion, reflecting an increase of 33.8% on Y-o-Y basis. Revenues for the period came in at NZ$1.73 billion, up 32.8% year over year. During the year, the company invested NZ$194.3 million in marketing, to drive brand awareness and conversion to trial in key growth markets and delivered an increase of 32.9% in EBITDA to NZ$549.7 million. The balance sheet of the company remains robust with a closing cash position of NZ$854.2 million.

Key Highlight (Source: Company Reports)

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: As per ASX, the stock of A2M is trading below the average of its 52-weeks’ high and low level. The company’s rapid growth and healthy balance sheet with significant cash reserves have created a wide range of options to fund its future growth. On a technical analysis front, the stock of A2M has a support level of ~$13.3 and a resistance level of ~$17.3. We have valued the stock using the P/E multiple based illustrative relative valuation and have arrived at a target price of mid-single-digit upside (in percentage terms). For the purpose, we have taken peers such as Wesfarmers Ltd (ASX: WES), Blackmores Ltd (ASX: BKL), and Restaurant Brands New Zealand Ltd (ASX: RBD). Considering the current trading levels, increased momentum for growth, resilient financial performance despite the market uncertainty and decent long-term outlook, we recommend a ‘Hold’ rating on the sock at a current market price of $14.43 down by 0.139% on 26 October 2020.

Coca-Cola Amatil Limited 

CCL to be acquired by CCEP: Coca-Cola Amatil Limited (ASX: CCL) is engaged in the manufacturing, distribution, and marketing of beverages. As on 26 October 2020, the market capitalisation of the company stood at ~$7.78 billion. Recently, the company informed the market that Coca-Cola European Partners plc (CCEP) has offered a non-binding, indicative proposal for the acquisition of all the issued shares in Amatil held by independent shareholders. As per the Scheme of Arrangement, CCEP will offer an all cash proposal to Independent Shareholders of $12.75 per Amatil share of ~A$9,282 million and an enterprise value of A$10,871 million, less any final 2HFY20 dividends declared and paid to Amatil shareholders prior to the implementation of any Scheme. In a separate acquisition, CCEP will acquire Amatil shares held indirectly by The Coca-Cola Company (TCCC), under the terms less favourable as compared to the terms offered to Amatil’s independent shareholders. Notably, independent shareholders have been advised not to take any action in relation to the proposal.

3QFY20 Key Update: During the third-quarter, revenue of CCL went down by 4.2% year over year, as compared to a decline of 9.2% reported by CCL in 1HFY20. The company’s volume was down 5.4% on pcp, as compared to a decline of 11.6% reported in 1HFY20. The company remained on track to continue its improvement in NZ and Australia post recovery from COVID-19 led outbreak. Net debt at the end of 3QFY20 stood at $1,745 million. The company has sufficient liquidity to repay all debt maturities over next 18 months. The company also paid an interim dividend of 9.0 cents per share.

1H20 Financial Highlights (Source: Company Reports)

What to Expect: The company is prioritizing to maintain its operational agility and supporting its customers and remains confident in its long-term outlook. The company remains on track to deliver $140 million of savings in FY20 and $85 million of further savings during FY21 through to FY22. 

Stock Update: As per ASX, the stock of CCL is trading close to its 52-weeks’ high of $13.18. On the technical analysis front, the stock of CCL has a support level of ~$11.5 and a resistance level of ~$12.65. The stock has gained ~30.48% in the past one month. The company has also gained a good market share in Australia and New Zealand and is working on strengthening its trademark and energy brands. The stock of CCL closed at $12.5 per share, up by 16.279% on 26 October 2020. This price movement in the stock was probably due to indicative proposal by CCEP to acquire Amatil shares.

Bubs Australia Limited

BUB Wraps Up Share Purchase Plan: Bubs Australia Limited (ASX: BUB) is engaged in the manufacturing of infant milk formula. The market capitalisation of the company stood at $450.39 million as on 26 October 2020. On 9^th October 2020, the company stated that it has completed its previously announced share purchase plan (SPP). The company received 492 applications for amounts more than A$3.8 million under SPP. The SPP was offered to existing eligible Bubs shareholders at A$0.80 per share.

FY20 Trading Update: For FY20, the company reported gross revenue of $62 million, up 32% year over year. The company witnessed a growth of 69% year over year in infant formula gross revenues, during the period. Contribution share of Infant Formula stood at 55%, an increase from 30% over two years. China FY20 direct revenue soared 32% from the prior corresponding period, depicting 23% of Group revenue. Normalised group gross margin in FY20 increased to 24%, from 21% in FY19. The company exited the period with a cash balance of $26 million.

FY20 Key Highlight (Source: Company Reports)

Fundamental Growth Drivers: The company aims for robust growth in FY21 through accelerated revenue streams. The company is focused on its fundamental drivers for its long-term growth, via its sustainable leadership in vertical supply chain value creation, deepening consumer brand connection to generate scale & improved margin. Optimized product mix, highest and best use of milk pool allocation and enhanced value chain expansion into new non-infant growth segments & new geographical markets are key growth strategies. The company will hold its annual general meeting on 23 November 2020.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Current ratio of the company stood at 3.37x in FY20 as compared to the industry median of 1.64x. This indicates that the company is in a decent position to address its short-term obligation against the broader industry. As per ASX, the stock of BUB is trading close to its 52-weeks’ low of $0.4. On the technical analysis front, the stock of BUB has a support level of ~$0.62 and a resistance level of ~$0.92. We have valued the stock using the price to book value multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as Tassal Group Ltd (ASX: TGR), Synlait Milk Ltd (ASX: SM1), Bega Cheese Ltd (ASX: BGA), to name few. Thus, considering the company’s decent liquidity position, robust FY20 results, capital raising program and fundamental drivers for the company’s long-term growth, we give a “Buy” recommendation on the stock at the current market price of $0.72 per share, down by 2.0.41% on 26 October 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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