The A2 Milk Company Limited

A2M Details

Business Update: The A2 Milk Company Limited (ASX: A2M) is engaged in the sale of branded milk products. As per a recent update, UBS Group AG and its related parties have undergone a change of interest in the company and held 5.20% stake in the company.  The company has recently confirmed the completion of its acquisition of 75% interest in Mataura Valley Milk, a dairy-based business located in Southland, New Zealand.

Trading Update:

• In view of the long-term health of the company, it may take steps to address the excess inventory.
• The company expects to make increased marketing spends in Q4FY21 and in FY22, in order to drive consumer demand.
• Q3FY21 sales performance was in line with the revised plan of ~NZ$295 million.

Trend in Cash Balance (Source: Analysis by Kalkine Group)

Key Risks: The company is prone to inventory management issues which could impact the performance of the company in the medium term.

Outlook: The company is expecting the revenue to be in the range of NZ$1.20 billion and NZ$1.25 billion in FY21, reflecting lower than expected sales in Q4FY21 period. It is expecting an EBITDA margin of 11% to 12% in FY21.

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: As per ASX, the stock of A2M is trading below its average 52-weeks’ levels of $5.040-$19.750. The stock of A2M gave a negative return of ~40.16% in the past six months and a positive return of ~7.77% in the past three months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average EV/Sales (NTM trading multiple), considering the inventory risk and impact of COVID-19 on the business. For the purpose of valuation, few peers like Bubs Australia Ltd (ASX: BUB), United Malt Group Ltd (ASX: UMG), Australian Agricultural Company Ltd (ASX: AAC) have been considered. Considering the expected upside in valuation and current trading levels, steps taken to resolve inventory issues, completion of the Mataura Valley Milk acquisition, and associated business risks, we recommend a ‘Buy’ rating on the stock at the current market price of $5.96, up by ~1.71% as on 13 August 2021.

A2M Daily Technical Chart, Data Source: REFINITIV

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.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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