Stocks’ Details
 

The A2 Milk Company Limited

Robust growth but trading at premium valuation: The A2 Milk Company Limited (ASX: A2M) has via a recent release announced the appointment of David Hearn as Chairman of the a2 Milk Company to support the company’s business in the UK and Europe. With early retirement of General Manager International Development and Head of Business Development, the company has new senior leadership in place.

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 margins improved over the year and were recorded at the NZ$464.30 million up from the previous $263.50 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 favorable foreign currency movements and improving net selling prices.
 
Improving Customer Demand to Act as Tailwinds: Going forth, the company expects that rapid growth would continue, however at a moderate rate as compared to the first four months of FY2019. This would be on account of the growing consumer demand for healthcare & wellness products. The growth is also expected to be on account of the food safety standards being raised as well as traction towards organic products.
 
On the financial metrics front, the company is trading at a trailing PE ratio of 36.60x as compared to the Industry median of 10.1x, hence the company is trading at a premium valuation.
 
Meanwhile, the stock price has risen by 1.79% in the past 6 months as on 10 January 2019. Thus, considering the premium valuations at which the company is trading we may witness some further corrections going forward.
Based on the above-mentioned parameters, we advise to have a wait and watch strategy on the stock at the current market price of $10.710 as on 11 January 2019.
 

Bellamy's Australia Limited

Decent growth in revenues but looks overvalued at current prices: Bellamy's Australia Limited (ASX: BAL) stated via a recent release 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 permit a facility to manufacture infant formula for export to China.

BAL’s financial highlights (Source: Company Reports)
 
For the FY 2018, the company reported a rise in revenue of 37% from FY 17 of $240 million to reach at $329 million in FY 18. This was on the back of a much stronger channel growth in comparison with the previous year, due to the channel restructuring.

Normalized EBITDA saw a rise of 65% from FY 17 of $43 million to $71 million in FY 18. This was achieved on the back of investments made in the supply chain. For example – local Organic milk pool, Camperdown facility and IP ownership. Ingredient procurement and manufacturing savings also drove the COGS savings, and thus a better margin.

Increased Competition to Weigh Over FY 2019 Performance: Going forth, 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, the company’s outlook might recover due to its product differentiation strategy & constantly growing online and offline channels opportunities. For FY 2019, the company expects EBITDA margins to be in the range of 22-25%.

On the financial metrics front, the company is trading at a trailing PE ratio of 18.30x as compared to the Industry median of 10.1x, hence the company is trading at a premium valuation at this price.
 

Meanwhile, the stock price has fallen by 46.01% in the past 6 months as on 10 January 2019. Thus, considering the premium valuations at which the company is trading and the regulatory and competitive headwinds it faced in the past, we may witness some further corrections going forward.

On the backdrop of these factors, we advise for a wait and watch strategy on the stock at the current market price of $7.240 as on 11 January 2019.
 

Wattle Health Australia Limited

Strong sales channel & certification renewal by Blend & Pack:Wattle Health Australia Limited (ASX: WHA) has through a recent ASX release made an announcement stating that Blend and Pack Pty Ltd  (B&P) has renewed its Certification and Accreditation Administration of the People’s Republic of China for manufacturing infant formula. B&P is the largest independent manufacturer of nutritional dairy products in the Australian region; and WHA is a shareholder of B&P.

For the 1Q 2019, the company registered a sale of circa $3.75 million. This was achieved on the back of its first sales in China with the introduction of the natural baby food range and skim milk powder. Also, the company introduced its products into the highly lucrative Indian markets during the quarter.

The company’s cash at bank rose to the levels of $52.05 Mn. This increase in cash was witnessed on account of the consolidation of the WHA and CBDG accounts.
 

WHA’s FY 2018 financial highlights (Source: Company Reports)

Increased Distributions to Support WHA Moving Forward: Going Forth, Little Innoscents or LI expects to grow its sales at a rate of circa 30% for the FY 2019, mainly on the back of its growing distribution networks.

On the daily chart of WHA, Exponential Moving Average has been applied and default values were considered. As per the observation, the stock price has crossed the EMA; and, after the crossover, the stock had moved upwards. While it is gaining traction lately, the stock has fallen by 14.53% in the past 6 months as on 10 January 2019.

Considering the above factors,we maintain a “Speculative Buy” recommendation on the stock at the current market price of $1.040 as on 11 January 2019.


Stock Price Comparative Chart (Source: Thomson Reuters)
 

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