­­­The a2 Milk Company Limited

A2M Details

FY21 Financial Performance: The A2 Milk Company Limited (ASX: A2M) is a nutritional dairy company that commercialises A2 protein type branded milk and related products in New Zealand, Australia, China, and other Asian countries the United States.

• Top Line Update: In FY21, the company reported a revenue of NZ$1,207 million, considerably down by 30.3% YoY, primarily affected by unprecedented uncertainties and volatility due to COVID-19 hampering English label infant nutrition channels.
• Bottom Line Update: The gross margin stood at 42.3%, reflecting stock write-downs, adverse mix impact and higher COGS. EBITDA dipped by 77.6% and clocked NZ$123.4 million due to higher distribution costs and a shredded top line.
• Cash Position: Cash balance surged marginally to NZ$875.2 million as of 30 June 2021 relative to NZ$854.2 million as of 30 June 2020, primarily driven by NZ$80.7 million contributions from NPAT and NZ$21.4 million from favourable movements in work capital, partially offset by NZ$39.8 million investment in Synlait and NZ$24.5 million investment in Intangibles and PP&E.

Bottom Line Flow, Analysis by Kalkine Group

Key Risks and Challenges

• High Reliance on the Chinese Market: The growth of Chinese infant nutrition has subdued significantly relative to globally high rates.
• Supply Chain Constraints: Cross border trade has been affected substantially due to challenges faced by the global supply chain.

Outlook

In FY22, A2M plans to increase China’s marketing and brand investment to drive demand and improve brand health metrics. A2M expects robust underlying growth in key US liquid milk business accounts and incremental sales growth in Australian liquid milk for FY22.

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 gave a negative return of ~58.283% in the past year. The stock is currently trading lower than the 52-weeks’ average price level band of $5.040 - $13.410. 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). Compared to its peers, the company can trade at some premium, considering prudent working capital management for CBEC and daigou/reseller channels in FY21 and A2M’s confidence in FY22 fundamentals. For valuation, peers like Bubs Australia Ltd (ASX: BUB), Australian Agricultural Company Ltd (ASX: AAC), Costa Group Holdings Ltd (ASX: CGC), and others have been considered. Considering the current volatility in the dairy industry, growth in Australian milk and Infant-Nutrition-China Label sales in FY21, increased marketing spending in China, upside indicated by valuation, we give a ‘Speculative Buy’ rating on the stock at the closing price of $5.520, as of 15 December 2021, at 10:30 AM, (GMT+10), Sydney, Eastern Australia.

A2M Daily Technical Chart, Data Source: REFINITIV

AGL Energy Limited

AGL Details

FY21 Financial Performance: AGL Energy Limited (ASX: AGL) is one of the leading providers of gas, electricity, and telecommunication services to over 4.5 million residential, small, and extensive business and wholesale customer

• Operating Metrics: Revenue was registered at $10.942 billion In FY21, down from $12.160 billion in FY20, primarily attributed to unfavourable energy price movements. Underlying profits for the period declined to $537 million from $808 million in FY20, critically attributed to a $342 million shortfall in trading and origination of electricity and a $180 million plunge in trading and origination of gas.
• Cash Flow Movements: Net cash flow from operating activities stood at $1,250 million, down from $2,112 million in PcP. The significant decline was vastly attributed to contracted underlying EBITDA, which declined by 18% to $1,666 million.
• Financial Standpoint: As of 30 June 2021, AGL reported a cash balance of $88 million, down from $141 million in the previous year, and short-term investments stood at $539 million relative to $640 million the last year. However, AGL holds significant room for debt covenants as the gearing covenant stands less than 50% (currently 35.1%).

FY21 Bottom Line Flow; Analysis by Kalkine Group

Key Risks

• AGL is highly sensitive to wholesale and retail market pricing; electricity prices have witnessed a considerable plunge in recent quarters.
• Increased use of in-house solar energy further deprived aggregate electricity demand.

Outlook

AGL expects underlying EBITDA to wander in a range of $1,200 million to $1,400 million in FY22. Further, NPAT for the same period is estimated to stay range-bound by $220 million - $340 million. Additionally, AGL is on track to deliver a minimum of $150 million in operating cost savings in FY22 and targeting a $100 million reduction in sustaining capex by FY23.

Valuation Methodology: EV/EBITDA 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 AGL gave a negative return of ~53.036% in the past year. The stock is currently trading lower than the 52-weeks’ average price level band of $5.100 - $13.330. The stock has been valued using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ EV/EBITDA median, considering lower top-line generation. For valuation, few peers like Origin Energy Ltd (ASX: ORG), Oil Search Ltd (ASX: OSH), Beach Energy Ltd (ASX: BPT), and others have been considered. Considering reasonable cost-saving strategies, favourable liquidity position, Liddell’s EBITDA contribution, current trading levels, and upside indicated by valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $5.820, 15 December 2021, at 10:30 AM (GMT+10), Sydney, Eastern Australia.

AGL Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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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