The A2 Milk Company Limited

¹Ratios such as P/E, EPS, ADY are on Trailing Twelve-Month basis, which are subject to change based on certain factors such as company performance, and stock price changes.

²ROE has been taken for the Half-Year Ending December 2021.

A2M Details

This report is an updated version of the report published on the 17 June 2022 at 2:59 PM GMT.

Ceasing to be Substantial Holder: The A2 Milk Company Limited (ASX: A2M) is a premium branded dairy nutrition enterprise engaged in producing, selling, and marketing branded dairy and infant milk formula (IMF) products in Australia and the global market. BlackRock Inc, on 2^nd June 2022, ceased to be the substantial shareholder in A2M.

Quick Look-back: The below picture provides an overview of 1HFY22 performance as per geographic and product segment, which was in line with estimates of management:

Half-yearly revenue update (Source: Analysis by Kalkine Group)

Key Risks: The company faces the substantial impact of Covid-19 on its global and domestic business. The company operates multiple brands and trademarks, exposing it to intellectual property risk. Additionally, the competition in the industry also threatens the market positioning of the A2M brand.  

Outlook: The company has significantly increased the investment under its brand and other assets as a part of its growth strategy, leading to some improvement in FY22 but will not translate to higher earnings. Revenue in H2FY22 (including MVM) is expected to be higher than H2FY21, but the Covid-19 threat adds risk to the supply chain and could disrupt H2FY22 results.

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 of A2M is trading near its 52-week low level of $3.900, offering a decent opportunity for accumulation. The stock went down by ~22.41% 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 upside (in % terms). The company might trade at a slight discount to its peers, considering the rise in the Covid-19 case in China and supply chain constraints. For the purpose of this valuation, a few peers like Synlait Milk Ltd (ASX: SM1), Bubs Australia Ltd (ASX: BUB), Murray Cod Australia Ltd (ASX: MCA), and others have been considered. Considering the strategic partnership, accelerating online growth, focus on developing the O2O channel, decent growth prospect for H2FY22, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $4.000, as of 17th June 2022, at 10:30 AM (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macroeconomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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 for 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 a 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 price

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