A2 Milk Company Ltd

                 A2M Details
 
China and Australia FTA promising solid growth opportunity: A2 MILK Company Ltd’s (ASX: A2M) recently updated its revenue forecast to be of the order of $285 million as opposed to the earlier forecast of $267 million in FY16. Further, EBITDA is estimated to be of $22 million as opposed to the earlier forecast of only $12 million. The Platinum infant formula group revenue totaled $38 million in the last four months to 31 October 2015 as opposed to $8.7 million in prior corresponding period. We also note that Platinum infant formula rose over 650% driven by wide distribution across Coles, Woolworths as well as Independents and Pharmacy stores while the a2Milk fresh milk sales grew over 10% in FY15. Accordingly, the group’s revenues surged by 40% year on year (yoy) to $155.1 million in FY15. The Free Trade Agreement (FTA) between Australia and China would further boost the A2 Milk branded fresh milk opportunity in China. Meanwhile, A2M raised a capital of over NZ$40 million through underwritten placement, wherein the group placed over 58.8 million new fully paid ordinary shares at a price of NZ$0.68 per share, to strengthen its balance sheet and use the funds for the growth opportunities. A2M also reported a Share Purchase Plan offer for shareholders in New Zealand and Australia of up to NZ$15,000 per shareholder to raise over NZ$3 million.
 

Expanding China distribution (Source: Company Reports)
 
Stock Performance: A2Platinum infant formula brand is seeing rapid growth in Australian grocery as also noticed during Q4 FY15, and the group estimated a grocery market share of over 12% (as of 13 weeks ending August by value) with the sales for first 2 months of FY16 projected at over $13 million. The group is targeting to expand its e-commerce opportunity in China along with brand development. A2M reviewed its UK product format and accordingly intends to implement wider distribution. The group’s USA business performance continued to deliver solid performance and accordingly A2M intends to invest over USD 20 million from three years of launch. We believe that A2 would continue to build its IP, and further improve its opportunity via aggressive marketing on the benefits related to the A2 protein. The shares of A2M rallied over 78.72% (as of November 16, 2015) in the last six months and we believe that the group’s shares would continue to rally further and reiterate our “BUY” recommendation at the current price of  $0.88
 

Fonterra Ord Unit

      FSF Dividend Details
 
Diversifying business: FONTERRA ORD UNIT (ASX: FSF) is expanding its business in New Zealand, Sri Lanka, Australia, Chile, China, Malaysia, Brazil and Indonesia to drive growth and minimize the risk related to the volatile global prices and tough market conditions. The group upgraded its estimates of farmgate milk price of $4.60 that brings the total available for payout to $5.05-$5.15 kgMs and accordingly projects an earnings per share of 45 to 55 cents. FSF also decreased the milk production and accordingly estimates a 5% lower milk production. Fonterra’s reported revenue decrease of 15% yoy to $18.8 billion during fiscal year of 2015, due to lower milk prices despite sales volumes rising by 9% yoy to 4.3 million metric tonnes. On the other side, FSF improved its EBIT by 94% yoy to $974 million driven by better consumer and foodservice business during the second half on the back of enhanced ingredients business leading to better margins. Accordingly, the bottom line (NPAT) surged by 183% yoy to $506 million during the period. The group invested over $230 million over the past two years to enhance its capabilities for better volume and value growth. Meanwhile, FSF recently sold its 9% shareholding in the Bega Cheese for over $74 million and intends to invest these funds for future growth. Fitch has lowered the group’s long term issuer rating and senior unsecure rating to A from AA- and reduced subordinated debt rating to A- from A+. But Fitch as well as S&P gave a stable outlook to the firm.
 

FY15 Performance (Source: Company Reports)
 
The group is even partnering with Beingmate to acquire Darnum plant in Australia which manufactures nutritional powders like infant formula and other milk powders. Accordingly, FSF would boost its Anmum infant formula brand and strengthen its presence in China leveraging Beingmate distribution and sales network. With the stock surging over 15.86% in the last three months (as at November 16, 2015), we believe this positive stock momentum would continue in the coming months and accordingly we reiterate our “BUY” recommendation on this 4.31% dividend yield stock at the current price of  $5.07
 
 

 

Bega Cheese Ltd

        BGA Dividend Details
 
Challenging market conditions might pose performance pressure: Bega Cheese Ltd (ASX: BGA) reported a 4% improvement in its fiscal year of 2015 revenues to $1,112 million boosted by $72 million rise in nutritionals and consumer packed goods revenues. But, BGA’s margins were under pressure during the period as volatility in commodity prices led to $29 million decline. The group is focusing on valued added products which delivered improved margins during FY15 to offset the pricing pressure. BGA entered into six year infant formula product agreement with Bellamy’s organic, through its subsidiary Tatura Milk industries and also extended its long term relationship with Bellamy’s to leverage the demand for its infant formula products. The group also entered into partnership with Blackmores to develop wide range of nutritional products like high quality infant formula via its subsidiary Tatura. Bega also got $5 million grants from the federal government, as a part of its dairy bio nutrient project worth $22 million installed at Lagoon Street.
 

FY15 Performance (Source: Company Reports)
 
On the other hand, the dairy commodity prices are still under pressure while the group’s investments to increase its capacities and its value added projects might start delivering results post fiscal year 2016. Bega Cheese shares have rallied over 20.39% (as of November 16, 2015) in the last three months placing the stock at unreasonable valuation with the stock trading at very high P/E of 68.52x. BGA also has a very low dividend yield of 1.53%. Based on the foregoing, we give an “Expensive” recommendation to the stock at the current price levels of  $5.77
 
 

Warrnambool Cheese & Butter Factory Company Holdings Ltd

        WCB Details
 
Softness in first half performance: Warrnambool Cheese & Butter Factory Co. (ASX: WCB) reported that its net operating loss after tax during the first half of the fiscal year of 2016 fell to $1.2 million, a decline of $18.1 million as compared to the prior corresponding period, impacted by the global international commodity prices pressure coupled with rising raw milk costs. WCB also witnessed after tax costs of $3.2 million related to the acquisition and integration of the everyday cheese business which the group acquired from Lion-Dairy & Drinks in May. WCB acquired Lion-Dairy & Drinks for $137.5 million to boost its penetration in the consumer branded everyday cheese products segment in Australia. On the other hand, given the tough commodity prices and higher costs of raw milk, we believe that the stock would be under pressure in the coming months. Moreover, WCB shares delivered a year to date returns of 22% (as of November 13, 2015) placing the stock at relatively higher valuations. We give an “Expensive” recommendation to the stock at the current price.

 

Australian Dairy Farms Group

     AHF Details
 
Improving production capacity: Australian Dairy Farms Group (ASX: AHF) boosted its cash to over $14.9 million in FY15 as compared to $36,367 during prior corresponding period, driven by its three capital raisings with a total worth of $27.2 million. AHF’s revenue reached $2.7 million in FY15, but reported a net loss of $2.05 million impacted by dairy related costs. Moreover, the milk prices were under pressure during the period on the back of tough commodity prices. Meanwhile, AHF is enhancing its herd quality with its Brucknell 3 Farm and Brucknell 4 Farm entering into a contract with Fonterra to supply fresh milk production. The group also improved its overall annual milk production volumes, via acquisition of new farms and enhancing existing operations. Accordingly, AHF’s annual production capability from its present farms almost doubled to 15 million liters post the finishing of the Heywood Farm in September, as compared to 7.6 million liters in October 2014.
 

Estimated production chart (Source: Company Reports)
 
On the other hand, AHF shares fell over 33.96% during this year to date (as at November 16, 2015) and we believe that this fall might continue in the stock given the ongoing challenging commodity prices leading to the milk prices pressure. We give an “Expensive” recommendation to the stock at the current price levels of .
 

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