The a2 Milk Company Limited

A2M Details

Change in Substantial Shareholding: The a2 Milk Company Limited (ASX: A2M) is involved in selling branded milk and related products in targeted markets, which is A1 protein-free milk. It covers Australia and New Zealand, China and other Asia, the UK, and the USA. The Goldman Sachs Group, Inc. and on behalf of its subsidiaries changed their substantial shareholding from ~8.21% to ~6.83% on 8^th December 2021.

A2M’s Focus:

• After the acquisition of MVM for the consideration of ~NZ$268.5 million, A2M is focused on investing in other similar acquisitions such as the Kyvalley Dairy Group.
• Inventory management of the excess in inventory from 4QFY21 turns out to be effective, as channel inventory levels are reducing, product freshness is improving with the market pricing increasing. They intend to continue the same through 1Q FY 2022.

FY21 Top & Bottom Line:

• The uncertainty and volatility related to the prolonged impact of COVID-19 and the rapidly changing infant nutrition market in China has affected A2M. Thus A2M, reported total revenue of ~NZ$1.21 billion in FY21, which decreased down by ~30.3% Y-o-Y on Pcp.
• A2M’s net profit decreased by ~79.1% Y-o-Y to ~NZ$80.65 million. The company closed its cash balance at the end of 30^th June 2021 as ~NZ$875.15 million versus ~NZ$854.18 million at the end of 30^th June 2020.

Cash Balance Highlights (Source: Analysis by Kalkine Group)

Key Risks: The company operates in a variety of international markets, which 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 expects strong growth in the future. Though they expect the value of the overall infant nutrition market to decrease due to low children birth but expects its China Label infant nutrition sales to increase in FY22, and the company is focusing on reducing the distributor inventory to promote sales. With the expectations of ease in restriction in 2HFY22 in Australia, the company also expects an increase in sales in Australian Liquid Milk and USA Liquid Milk.

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 52-weeks’ average price levels of $5.040-$10.990. The stock gave a negative return of ~23.31% in the past six months and a negative return of ~30.86% in the past nine months. 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 uncertainty in China’s infant nutrition market, risks related to the COVID-19 pandemic, reduction in ROE, and squeezing in net margins. 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 current levels, reduction in the distributor inventory to promote sales, future acquisition and globalisation, upside valuation, inventory management, and decent outlook, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $5.33 per share, 11:50 AM (GMT+10), Sydney, Eastern Australia, as on 19 January 2022.

A2M Daily Technical Chart, Data Source: REFINITIV  

Redbubble Limited   

RBL Details

1HFY22 Results Updates: Redbubble Limited (ASX: RBL) operates an online marketplace, which allows independent creative designers to meet and sell products like apparel, mobile cases, homes decor items, stationery, bags etc. It was listed on ASX on 16^th May 2016. The company released its First-Half 2022 results on 18^th January 2022.

• Marketplace Revenue: The company has reported a decrease of ~14% in Gross Transactional Value (GTV) in 1HFY22. Nevertheless, it reported an increase of ~60% in its total marketplace revenue from 1HFY20 to ~$288 million in 1HFY22.
• Gross Profit: RBL reported a decline of ~25% Y-o-Y and ~36% Y-o-Y (in its gross profit and gross profit after the paid acquisition (GPAPA), respectively.
• EBITDA: The EBITDA has been filed as ~$8 million for 1HFY22, which is ~84% lower than 1HFY21. Stiff competition mainly in the holiday period, impacted organic (unpaid) demand, and an increase in paid advertising, and higher Customer Acquisition Cost (CAC) lowered the contribution margin especially in 2QFY22.
• Strong Growth in North America: RBL witnessed strong growth in its largest category apparel in NA, which was reflected by ~10% Q-o-Q in 2QFY22 and ~7% Y-o-Y in 1HFY22. The repeat rates improved from ~40% in 1HFY21 to ~45% in 1HFY22.
• Balance Sheet: It closed its half-yearly accounts with the cash and cash equivalents as of 31^st December 2021 at ~$143 million, with a ~10% Y-o-Y of growth from 1HFY21.

Unique Customers Growth Highlights (Source: Analysis by Kalkine Group)

Key Risks:

• Fluctuations in Demands and Sentiments: Due to the changes in customers’ preferences and sentiments, RBL is susceptible to the dynamic environment and its everchanging demands.
• COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company can be impacted by the lockdown regulations, affecting its sales.
• Technology Risk: The business’s efficiency also depends on the ease of its interface and technology provider to the customers and work with regular upgradation.

Outlook FY22: As per its recent Half-Yearly update, the group expects:

• A slight decrease in its marketplace revenue in FY22 from FY21.
• Its EBITDA margin to be negative low single digits in FY22.
• The investments related to its medium-term aspirations remain to be aligned in 2HFY22.

Looking forward to the medium-term aspirations, the company intends to reach ~$1.50 billion GTV with ~$250 million artists’ revenue and a total ~$1.25 billion per annum in marketplace revenue, thereby putting a forward foot in growing the product portfolio.

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 RBL is trading close to its 52-weeks’ low level of $2.110. The stock gave a negative return of ~43.30% in the past six months and a negative return of ~60.79% in the past nine months. The stock has been valued using the 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 some discount to its peers, considering the targeted investments to be made in marketing and OPEX, the COVID-19 and new variant Omicron headwinds, stiff competition and altogether affecting the gross and net margins. For the purpose of valuation, few peers like Temple & Webster Group Ltd (ASX: TPW), Adore Beauty Group Ltd (ASX: ABY), Kogan.com Ltd (ASX: KGN) have been considered. Considering the expected upside in valuation, current trading levels, targeting the medium-term aspirations, maintenance of artists and customers’ retention, diversification through products and globalisation, optimistic long-term outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.135, 02:40 PM (GMT+10), Sydney, Eastern Australia, as on 19^th January 2022.

RBL 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 is 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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