The a2 Milk Company Limited

A2M Details

The a2 Milk Company Limited (ASX: A2M) is engaged in the sale of branded products in targeted markets made with milk from cows that produce milk naturally containing only the A2 protein type. 

FY21 Performance Highlights:

• The company’s total revenue decreased to ~NZ$1.21 billion in FY21, down ~30.3% from FY20. Notably, the decline was mainly due to the unprecedented levels of uncertainty and volatility linked to the prolonged impact of COVID-19. The rapidly changing infant nutrition market in China was also another big factor.
• The actions taken from 4QFY21 in order to address the excess inventory are proving effective as channel inventory levels are reducing, product freshness is improving as well as market pricing is increasing. Notably, the rebalancing of channel inventory is anticipated to continue through 1Q FY 2022.
• A2M reported a net profit of ~NZ$80.65 million, a decrease of ~79.1% Y-o-Y from FY20 with a total liability decreased to ~NZ$288 million. Its cash balance at the end of 30^th June 2021 was reported as ~NZ$ 875.15 million.

Source: Analysis by Kalkine Group

Recent Update

• A2M is focused towards investing in acquisitions such as the Kyvalley Dairy Group acquisition and lease-back, the Synlait capital raising and the ERP implementation.
• The company completed the acquisition of MVM for the consideration of ~NZ$268.5 million.

Key Risks

The company operates in a variety of international markets and is prone to risks related to the COVID-19 pandemic and other competitive pressures. Operating internationally also means that its overall business is more likely to be affected as a result of fluctuations in foreign currency exchange rates.

Outlook

A2M is confident in the fundamentals of its business, and it has a strong outlook on the future. It also acknowledges the inevitable challenges related to COVID-19 and other rapidly changing market dynamics. The overall marketing investment in FY22 is expected to return to approximately FY20 levels which is anticipated to continue to drive improved brand health metrics as well as future demand.

Valuation Methodology: EV/Sales 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 has been valued using EV/Sales based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average) (approx) considering the risks related to the COVID-19 pandemic, reduction in ROE, and squeezing in Net Margins. However, the company is possessing a decent outlook. For the purpose of valuation, peers such as Bubs Australia Ltd (ASX: BUB), Costa Group Holdings Ltd (ASX: CGC), Australian Agricultural Company Ltd (ASX: AAC), and others have been considered. Considering the aforementioned factors, we give a “Speculative Buy” recommendation on the stock at the current market price of AU$5.470 per share, 11:53 AM (GMT+10), Sydney, Eastern Australia, as on 10^th January 2022.

TNT Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note: Purple Color Line Reflects RSI (14-Period)

Note 2:  Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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 the 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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