(Asx: A2M) | A2 Milk Company

Sep 28, 2021

Sentiment: Sideways

Type of Trade: Conservative

Industry: Farm Products | Milk, Infant Formula & Diary

Sector: Consumer Staples

The A2M Company is a New Zealand licensor and marketer of fresh milk, infant formula, and other dairy products that lack the A1 beta-casein protein. The firm was founded in 2000 by Corran Mclachlan, who develop genetic test to determine which proteins a cow produces in its milk, and business partner Howard Patterson. Challenges in English label channels put pressure on market share.

The share price had been performing extremely well between 2016 and 2020 rising by 3,267% from 60c to as high as $20. Since August 2020, the stock has taken a heavy toll due COVID-19 pandemic and it is currently trading 69% below its all times high (ATH).

Many investors have been trying to pick the bottom between $10-$5, and since May it appears the SP has broke out its bearish trend and bounced back from $5 couple times making what technique analysts call double bottom formation.

A double bottom pattern is a technical analysis charting pattern that describes a change in trend and a momentum reversal from prior leading price action. It describes the drop of a stock or index, a rebound, another drop to the same or similar level as the original drop, and finally another rebound.

See the example below:

Now look at A2M Chart formation

FY21 Full year results were poorly received by investors as the company has been downgraded its earning several times with Revenue and EBITDA margin down as following:

???? Revenue down 30.3% to $1.21b

???? EBITDA down 77.6% to $123m including stock write-down and MVM acquisition costs.

???? EBITDA margin of 10.2% or 11.1% excluding MVM acquisition costs.

???? Chinese Local players continued to gain share against the traditional multinational brands, but so A2M chinese brand,nevertheless still rising red flag.

???? Performance: Australian daigou/resellers and retailers with Sales of a2 Platinum® English label infant nutrition of $357.0 million, down 52.1% and Significant decrease was due mainly to prolonged impacts emanating from COVID-19 volatility.

✅ Interesting enough the company continue to be profitable with net profit after tax down 79% to $80.8 million. Think about what are the listed companies making NPAT of $80m per year?

The problems generated by COVID, the relationship with china, has caused a massive disruption of digoel channel, hence making the firm to change its strategy and start looking for different ways to growth the business.

✅ A2M has recently completes strategic acquisition of 75% interest in Mataura Valley Milk. The acquisition is strategically important as it provides the opportunity for a2MC to participate in nutritional products manufacturing, in addition to offering supplier and geographic diversification, as well as strengthening relationships with key partners in China. We believe it was a smart move by the firm.

✅ The company is also reviewing its growth strategy to respond to rapidly changing China market dynamics.

✅ The fact the Board has carefully considered capital management initiatives and has decided not to return capital to shareholders in the last financial year has already been priced into the SP and equally straight the company balance sheet.

✅ Although the key financial metrics were poor than FY20, we believe that such as downgrade has finally been priced in offering fundamental value for the stock at $5-$6 level.

✅ ANZ liquid milk growth and still set to growth further.

✅ Company is still set to invest further in USA despite the poor performance in FY21, mostly due to what the firm calls “unfavourable foreign exchange” is an important market. Some of the plans of the company to so called change in execution approach are described as following, and is belief to be helpful to increase sales in USA.

  • Leveraged trade investment to bring price to an affordable premium
  • Objective to increase conversion and household penetration
  • Increasing range, facings and improving overall shelf positioning
  • Improvements in brand health metrics

A2M acknowledges USA the largest global milk market with significant and growing premium segment and growth in awareness to create a platform for future product innovation. A2M also launched in Canada via a licensing agreement with Agrifoods.

Growth Prospect

The Company is confident in the underlying fundamentals of the business and the growth opportunity remains strong with a positive long-term outlook. However, given the continuing uncertainty and volatility in a2MC’s consumer markets resulting from issues related to COVID-19 and the rapidly changing market dynamics in China, the Company has determined not to provide specific guidance, hence putting various investors in selling mode by overacting. No guidance means not certainty and the stock will purely trade on market sentiment.

Our view is that absence of guidance means potential further downgrade that the firm has chosen no to disclose.

  • The key drivers and important issues that may impact FY22 results is provided as following:
  • China infant nutrition market
  • Category and business divisions
  • Marketing and capability investment
  • Key financials

Overall, we believe that is a good gap to trade (Asx: A2M), however investors or traders should caution about holding the stock during report or earning seasons. Traders can take advantage of potential SP swings of 20-30%, provided the SP has stop fallen and is currently moving either sideways or building a reversal. The fact that Australia is looking to open its borders early next years could be a key emotional driver for this stock.

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