The A2M Milk Company Limited

A2M Details

Change in Shareholding: The A2M Milk Company Limited (ASX: A2M) is engaged in the sales and distribution of branded milk business and associated products. A2M has products and trading activities in New Zealand, Australia, North America, Greater China, and other selected emerging markets.  On 23 July 2021, A2M announced that Mitsubishi UFJ Financial Group, Inc., Mitsubishi UFJ Kokusai Asset Management Co., Ltd., Mitsubishi UFJ Trust and Banking Corporation, First Sentier Investors (Australia) IM Limited, First Sentier Investors Realindex Pty Limited, have increased their ordinary shareholdings from 5.689% to 6.745% in the company.

New Leadership Additions:

• On 12 July 2021, A2M announced the appointment of Xiao Li as a Chief Executive for the company’s business in Greater China. Yohan Senaratne was appointed as the Executive General Manager for the export business of the company.

Acquisition Update:

• On 5 July 2021, A2M received consent from the New Zealand Overseas Investment Office (OIO) for the company’s offer to acquire 75% interest in Mataura Valley Milk (MVM) business in New Zealand.
• A2M expects the deal to be completed in July 2021-end.
• China Animal Husbandry Group (CAHG), currently the majority shareholder in MVM, will now hold a 25% interest in the company besides A2M.

Highlights of Q3FY21 (March Quarter):

• A2M reported sales of $295.0 million in Q3FY21, broadly in sync with the revised plan.
• A2M reported a decline of 56% YoY and 77% YoY in the infant nutrition sales in the ANZ segment and the CBEC channels, respectively, for Q3FY21.
• The company’s liquid milk business in Australia performed strongly, and the US business performance was also in sync with the plan for Q3FY21.
• The company posted $98.0 million of sales from China label infant nutrition, up by 5% YoY.

Revenue & Net Income Trend for FY18-FY20; (Analysis by Kalkine Group)

Key Risks:

• The business is exposed to the potential damage in product quality and food safety, which may cause injury to consumers and damage company’s reputation and brand.
• The company faces the risk of excess inventory levels across its daigou/reseller and cross-border e-commerce channels (CBEC) during the ongoing COVID-19.

Outlook:

• The company has lowered the targeted revenue for FY21 in the range of $1.20-$1.25 billion compared to $1.40 billion declared previously.
• A2M has also reduced the FY21 targeted EBITDA margin in the range of 11%-12% (exclusive of costs of the MVM deal) versus 24-26% declared in December 2020.
• The management is contemplating of undertaking capital management initiatives such as share buy-back and will update in August at the time of FY21 results.
  

Valuation Methodology: EV/EBITDA 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 A2M gave a positive return of 10.57% in the past month and a negative return of 34.02% in the past six months. The stock is currently trading close to its 52-weeks’ low level of $5.040. We have valued the stock using the Enterprise Value to EBITDA based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms).

We believe that the company can trade at some discount than its peer median, considering its lower guidance for FY21 revenue and EBITDA margin, continued difficult trading dynamics in Chinese infant nutrition market, and the risks associated with the excess inventory levels and visibility difficulties in the CBEC and reseller channels. For this purpose, we have taken peers like Synlait Milk Limited (ASX: SM1), Bega Cheese Limited (ASX: BGA), Clover Corporation Limited (ASX: CLV) and others. Considering the current trading levels, increase in sales of China label infant nutrition and strong performance of the liquid milk business in Q3FY21, current trading levels, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $6.690 (as of 23 July 2021, 2:40 PM, Sydney, Eastern Australia).

A2M Daily Technical Chart

Source: REFINITIV, The purple color line reflects RSI-14 Period

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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