Bellamy's Australia Limited

Improving Financials on the Back of Channel Restructuring: Bellamy's Australia Limited (ASX: BAL) revealed that Camperdown Powder Pty Limited (Camperdown) blending and canning line at Braeside, Victoria has received a licence extension from the General Administration of Customs China (GACC) till 31 December 2019. This GACC licence will allow this installation the necessary permit which is needed to manufacture infant formula for export to China.
 
The company expects the FY 2019 performance to be hit by the slower category growth and the increasingly competitive business environment. However, in the medium term, BAL’s prospects may improve due to its product differentiation strategy & steadily mounting online and offline channels opportunities. For FY 2019, the company expects EBITDA margins to be in the range of 22-25%.

BAL’s financial highlights (Source: Company Reports)
 
For the FY 2018, the company reported a surge of 37% in revenueof $240 million in FY17 to reach at $329 million in FY 18. This was on the back of a much robust channel growth in comparison with the previous year, due to the channel restructuring program undertaken.
 
Normalised EBITDA saw a rise of 65% from FY17 of $43 million to reach at $71 million in FY 18. This was achieved on the back of investments that were made in the supply chain. For example – local Organic milk pool, Camperdown facility and IP ownership.  On the financial metrics front, the company is trading at a trailing PE ratio of 21.99x as compared to the Industry median of 10.70x; hence the company is trading at a premium valuation at this price. However, the pre-tax margins for the FY18 were 18.60% vis-à-vis negative 0.3% for the FY17, thus indicating a turnaround in the financial performance of the company. Meanwhile, the stock price has gained by 11.08% in the past three months as on 5 February 2019. Thus, considering the channel restructuring program undertaken which is yet to take its complete effect, extension of GACC license, strong EBITDA guidance for FY19 and the improving financial performance, we advise a wait and watch view on the stock at the current market price of $9.08 (Up 5.336% as on 6 February 2019).
 

The A2 Milk Company Limited

Robust growth in FY18: The A2 Milk Company Limited (ASX: A2M) had lately informed the forming of two new positions. Melanie Kansil will join the company as a Chief Commercial Officer in the 1H FY19. Also, Phil Rybinski has been appointed for the role of Chief Technical Officer, effective from April 2019. Both officials join the firm with substantial and diverse experience across a range of consumer-driven industries.
 
The company expects that rapid growth would continue, however at a reasonable rate as compared to the first four months of FY2019. This would be on account of the rising consumer demand for healthcare and wellness products & positive regulatory outlook. The growth is also expected to be on the back of the food safety standards being elevated as well as traction towards organic products.
 

A2M’s Financial Highlights (Source: Company Reports)
 
For FY 2018 the company registered revenue of NZ$922.70 million, up by a stellar 68% on a YoY basis.This was achieved on account of the impressive sales of “a2 platinum” infant formula across Australia and China along with a constant increase in the market share.
 
Gross profits improved over the year and were recorded at the NZ$464.30 million up from the previous $263.52 million, registering a change of more than 76% on a YoY basis. This was on account of the better product mix with an increased proportion of infant formula sales as well as favourable foreign currency movements and improving net selling prices. On the financial metrics front, the company is trading at a trailing PE ratio of 49.15x as compared to the food and tobacco Industry median of 10.7x; hence, the company is trading at a premium valuation. However, the pre-tax margins for the FY18 were 30.70% vis-à-vis the industry median of 6.70%, thus indicating much better profitability compared to the concerned industry.
 
Meanwhile, the stock price has risen by 26.90% in the past six months as on 5 February 2019. Thus, considering the impressive sales of “a2 platinum”, growing traction towards organic products, decent FY18 results and higher than industry margins, we advise for a wait and watch strategy on the stock at the current market price of $12.43 (up 2.136% on 6 February 2019 as the price to earnings ratio is still high at 49.15x.
 

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