The a2 Milk Company Ltd

A2M Details

The a2 Milk Company Ltd (ASX: A2M) is engaged in the branded milk business that it produces from cows that produce only the A2 protein type. It has products and trading activities across New Zealand, Australia, Greater China, North America, and selected emerging markets.

H1FY21 Results Performance (For the Period Ended 31 December 2020)

The company has reported a 16.0% YoY decline in revenue to $677.4 million owing to challenges in daigou/reseller and cross-border e-commerce (CBEC channels). EBITDA reduced by 32.2% to $178.5 million with an EBITDA margin of 26.4% (27.0% excluding Mataura Valley Milk acquisition costs) due to the impact of lower revenue, a stock provision, and adverse mix.

Consolidated Comprehensive Income Statement (Source: Company Report)

Trading Update

In-line Sales: The group’s sales performance during Q3FY21 stayed largely in line with the revised plan at $295.0 million. Sales of Infant nutrition in the ANZ segment and CBEC channel decreased by 11% and 57%, respectively over Q2FY21 and were down by 56% and 77% respectively over Q3FY20. However, sales of China label infant nutrition increased by 5% over Q3FY20, while it was down by 18% on Q2FY21.

Liquid Milk Business Performed Well: The company continued to witness a strong performance at the Australian liquid milk business, while the performance of the liquid milk business in the USA remained in line with the plan for Q3FY21.

Looking for Share Buy-Back: The board is aggressively mulling capital management initiatives, comprising a potential share buy-back. The company will provide the update in FY21 results in August 2021.

Outlook

Guidance Revised Downwards: The company has revised down its revenue guidance for FY21 from its earlier outlook provided in February. It now expects to achieve revenue in the range of $1.20 billion to $1.25 billion. This shows the impact of the lower-than-expected sales in Q4FY21 as compared to its earlier estimation along with the additional initiatives undertaken to rebalance the channels. Resultantly, it is estimating to generate an EBITDA margin between 11% to 12% (excluding MVM transaction costs) for FY21, significantly lower from its earlier outlook.

Mulling on Price Hike: To reinstate its premium price positioning and offset the impact of the cost of goods sold pressures, the company is considering an increase in the wholesale price across its English label infant nutrition product portfolio.

Got Approval On Acquisition of a 75% Interest in MVM: On 5 July 2021, the company has bagged approval from the New Zealand Overseas Investment Office (OIO) for its proposed acquisition of a 75% stake in Mataura Valley Milk (MVM) based in Southland, New Zealand. The transaction will be effective from July 2021 end.

Key Risks

The company’s daigou/reseller channel has been cyclically impacted by COVID-19, regulatory, and other structural factors. Further, it is witnessing challenges in the daigou/reseller and CBEC channels mainly because of excess inventory.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock seems to be forming a ‘Rounding Bottom’ with a higher-high close observed in a couple of weeks. In line with the trend, the stock has given a higher close for the ongoing week around its peak price of $7.27 at $7.16 thereby exhibiting strength in its trend. The technical indicator RSI with a reading around 40 and a curve at the end pointing a sharp up, suggests neutral to up momentum for the stock.

Going forward, the stock may have resistance around the 23.6% retracement level of $8.57 whereas support could be around $6.50.

Stock Recommendation

The stock declined by ~50.2% in 9 months. It has made a 52-week low and high levels of $5.040 and $20.00, respectively. We have valued the stock using a Price/Earnings multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). We have assigned a slight discount to Price/Earnings Multiple (NTM) (Peer Average) considering the challenges in the daigou/reseller and CBEC channels and expected lower performance in FY21.

Meanwhile, to drive consumer demand, the company is planning to boost the marketing investment in Q4FY21 and FY22. It remains assured in the long-term opportunity of the infant nutrition market in China and is eyeing to build on the strong position. Besides, the company’s balance sheet remains healthy with no debt and a cash position of $774.6 million at the end of 31 December 2020. The strong balance sheet provides the capacity to fund growth opportunities.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of $7.160 per share, up by 0.987% on 8^th July 2021.

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

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 uptrend may take a pause due to profit booking or selling interest.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.