The a2 Milk Co Ltd (A2M) – Neutral
The a2 Milk Co (A2M) reported another solid result which came in above market expectations.
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Consumer Staples||52-Week Range: A$4.47 – 13.78|
|Industry: Food Products||Market Cap: A$7,843.7m|
We rate A2M as a Neutral for the following reasons:
- Targeted and distinctive product portfolio, with A2M’s a2 Platinum product gaining market share over competitors.
- Wining market share in Australia and China.
- Growing consumer demand for health and well-being globally.
- Strong demand growth in China for infant formula product.
- Expansion into new priority markets, aided by the capabilities of Fonterra.
- US expansion provides new markets + opportunities.
- Key patents provide barrier to entry.
- Takeover target – the Company was the subject of a takeover bid in 2015.
We see the following key risks to our investment thesis:
- Chinese demand underperforming market expectations.
- Disruption to A2 milk supply.
- Increased competition, including private labels & competitors developing products or branding that erode the differentiation of A2M branded products from other dairy products.
- Expiration of A2M’s intellectual property rights may weaken or be infringed by competitors.
- Withdrawal of A2M product from international markets due to market share loss or lack of market penetration.
Figure 1: A2M Revenue by Region
The a2 Milk Co (A2M) reported another solid result which came in above market expectations.
For FY18, revenue of NZ$922.7m was in line with estimates, EBITDA of NZ$283m was ahead of estimates of NZ$277m and NPAT of NZ$195.7m versus NZ$191m. Driving top line growth was +83.8% year on year growth in infant formula products, with A2M’s infant share in China growing from 2.8% to 5.1%.
Relative to previous corresponding period (pcp), group revenue was +68% higher, operating earnings (EBITDA) up +101% and NPAT was up +116% to NZ$195.7m. The only disappointment in the results release was the date for the U.S. business to deliver positive growth has been pushed out.
Continued successful execution of sales and marketing strategies that increase brand awareness, as well as new growth opportunities through the Fonterra, Synlait and Yuhan partnership render A2M a high-quality company which appears to be well and truly positioning itself to be a global dairy company.
We maintain our Neutral recommendation on valuation grounds, but the stock is likely to exceed our expectations.
- By regions:
1. ANZ continued with strong revenue and earnings performance. ANZ revenue was up +49% and EBITDA up +69% to NZ$262.2m, driven by growing infant formula market share (up to 32%), steady growth in fresh milk (revenue up +4% on pcp) and a pickup in revenue of milk powder products alongside new product launches;
2. Exceptional growth in China & other Asia continues. The China and other Asia business recorded an increase in revenue of +163%, and EBITDA up +148% to $81.3m, with increased investment in brand awareness through sales and marketing driving growth. The Company continues to support the strong growth of the China business, with the on-going focus on distribution channel strategy and marketing contributing significantly to overall expenses;
3. Positive EBITDA goals shift forward for the UK & U.S. business. Revenue for the two increased +54.3% on pcp, including the $15m revenue contribution in FY18 from infant formula sold to UK exporters, while EBITDA was down -$27.6m. For the U.S., the Company assumes approximately US$22m forward investment over FY19 before positive monthly EBITDA will be achieved in the next three years. The UK continues to experience strong volume growth (+50% on pcp) and will transition between suppliers in early FY19 which management anticipates will not create disruption to stock availability. However, the Company notes challenges in delivering scale to the market.
- Growth strategy continues with launch of new products and entry into new regions. A2M has continued its growth strategy with the launch of three new products in milk powder and pregnancy formula. The Company continues to investigate key markets to enter in the South East Asia region, with the strategic relationship with Fonterra Cooperative Group providing leverage to increase supply capacity and an exclusive distribution agreement with Yuhan Corporation for the South Korea market. To support the growth strategy, the Company’s investment in brand building and marketing grew by $31.6m to $73.6m.
- Management awaits impact of evolving Chinese regulatory environment. The CBEC grace period is scheduled to expire in December 2018 and the Company expects further announcements closer to the date regarding regulation surrounding online B2C tariffs.
FY18 RESULTS SUMMARY…
Figure 3: FY18 A2M Geographic and Product Segment Performance
Source: Company; Numbers may not correctly add up due Corporate
1. ANZ continued with strong revenue and earnings performance. ANZ revenue was up +49% and EBITDA up +69% to NZ$262.2m, driven by growing infant formula market share, steady growth in fresh milk (revenue up +4% on pcp) and a pickup in revenue of milk powder products alongside new product launches.
2. Exceptional growth in China & Other Asia continues. The China and other Asia business recorded an increase in revenue of +163%, and EBITDA up +148% to $81.3m, with increased investment in brand awareness through sales and marketing driving growth. The Company continues to support the strong growth of the China business, with the on-going focus on distribution channel strategy and marketing contributing significantly to overall expenses.
3. Positive EBITDA goals shift forward for the UK & US business. Revenue for the two increased +54.3% on pcp, including the $15m revenue contribution in FY18 from infant formula sold to UK exporters, while EBITDA declined to -$27.6m. For the U.S., the Company assumes approximately US$22m forward investment over FY19 before positive monthly EBITDA will be achieved in the next three years. The UK continues to experience strong volume growth (+50% on pcp) and will transition between suppliers in early FY19 which Management anticipates will not create disruption to stock availability. However, the Company notes challenges in delivering scale to the market.
Outlook. Marketing expenditure is expected to be higher than FY18 given stronger focus on growth initiatives in emerging markets as well as continued investment in the Australian market. Management expects EBITDA to sales ratio to be broadly consistent with FY18 and anticipates further growth in revenue particularly in respect of nutritional products in ANZ and China.
Figure 4: A2M Financial Summary
Source: BTIG, Company, Bloomberg
The a2 Milk Company Limited (A2M) sells a2 brand milk and related products. The company owns intellectual property that enables the identification of cattle for the production of A1 protein free milk products. It also sources and supplies a2 brand milk in Australia, the UK and the US, exports a2 brand milk to China, and distributes and markets a2 brand milk and a2 Platinum brand infant nutrition products in Australia, New Zealand, and China.
Recommendation Rating Guide
|Recommendation Rating Guide||Total Return Expectations on a 12-mth view|
|Speculative Buy||Greater than +30%|
|Buy||Greater than +10%|
|Neutral||Greater than 0%|
|Sell||Less than -10%|
Reach Markets Disclaimer
Reach Markets Pty Ltd (ABN 36 145 312 232) is a Corporate Authorised Representative of Reach Financial Group Pty Ltd (ABN 17 090 611 680) who holds Australian Financial Services Licence (AFSL) 333297. Please refer to our Financial Services Guide or you can request for a copy to be sent to you, by emailing [email protected].
Read our full disclaimer here >
This publication contains general securities advice. In preparing the advice, Reach Markets Australia has not taken into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. Reach Markets Australia and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. Reach Markets Australia does, and seeks to do, business with companies that are the subject of its research reports. Reach Markets Australia believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Reach Markets Australia or any of its directors, employees or agents. This publication must not be distributed to retail investors outside of Australia.
It is recommended that you seek independent advice and read the relevant Product Disclosure Statement before making a decision in relation to any investment. Any advice contained in this communication is general and has not taken into account the investment objectives, financial situation and particular needs of any particular person.
Banyan Tree Disclaimer
This document is provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and Banyan Tree is not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Banyan Tree does, and seeks to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Banyan Tree, its associates, officers, directors, employees and agents. Except for any liability which cannot be excluded, Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Banyan Tree is not liable to recipients in any matters whatsoever otherwise recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Banyan Tree does not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Banyan Tree.
This document has been commissioned by Reach Markets Australia Pty Ltd and provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).