Should I Buy A2 Milk Shares

The share price of A2M has been bid down massively, with no signs of recovery. The fundamentals remain solid if the company can get their market strategy back on track. Does the current share price present a massive opportunity for A2M or is this catching a falling knife? Should I buy A2 Milk Shares?

A2 Milk Shares Price

Shares in A2 Milk have fallen drastically from their pre-COVID highs, with no signs of recovery. Today the share price is trading around $6.03, which is down 66.56% over the last twelve months, and down 70% from its all-time high of $20.05 (18th June 2020). A2M has been trending down sitting at the lower end of its 52-week range of $5.04-$20

These moves leave the company at ‘rock bottom prices’, not seen since 2017. The A2M crash has wiped $10.4 billion dollars off the market cap, valuing the company at $4.475 Billion

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Should I Buy A2 Milk Shares, A2 Milk Shares Price, A2M ASX, A2M

Over the course of five years A2M is still up over 240%, and over 1000% since listing in 2015. 

But recently we’ve seen A2M amongst the top market movers for all the wrong reasons with the share price crashing 13.11% into the red on a single day after their last downgrade in May.

Should I Buy A2 Milk Shares: About

A2 Milk operates in the commercialization of A1 protein-free branded milk and related products. Their products are sourced from cows specially selected to naturally produce milk with only the A2 beta-casein protein. 

The A2 Milk Company was founded in New Zealand in 2000. Today they specialize in a portfolio of milk, milk powder, and infant formula products. They have products and trading activities in New Zealand, Australia, Greater China, North America, and a selection of emerging markets. 

Australia and New Zealand are the company’s established markets. A2M shares became popular due to their massive growth in exporting infant formula to the Chinese markets.  

A2 Milks revenues primarily consist of its infant formula products (78% of total revenue in 1H21), while its liquid milk products are a smaller, but still a significant contribution to the business (18% of total). 

A2M is dual-listed on both the Australian and New Zealand Stock Exchanges. 

A2M’s Constant Earnings Downgrades

On the 10th of May, A2M released their fourth downgrade since September 2020, as COVID’s macroeconomic impact has practically ended the company’s daigou channel, due to the complete reduction of tourism and international travel. 

“Globally there continues to be unprecedented levels of uncertainty and volatility due to COVID-19 which has significantly impacted markets in which the Company trades and consequently the performance of both A2M and many competitors” 

China label infant nutrition sales of $98.0 million were recorded for 3Q21 representing 5% growth on 3Q20 and an 18% decline on 2Q21.

The reduced rate of growth relative to 3Q20 is reflective of the substantial uplift in the prior period due to COVID-related pantry stocking. COVID-19 had a positive impact on the Company’s business at the start of the pandemic‚ when people were hoarding supplies.

Since then, the Company has been adversely affected by the ongoing lockdowns. Because of the lockdown, when international travel to and from Australia became restricted, the daigou resellers haven’t been able to resale products on behalf of Chinese consumers.

The Latest Targets 

The Company is now targeting revenue for FY21 in the order of NZ$1.20 billion to $1.25 billion. This is down from its earlier forecast of NZ$1.40 billion. A2M expects it to take some time to rebalance inventory levels and restore channel health. The Company is expecting earnings to sales margin for FY21 in the order of 11% to 12% (excluding MVM transaction costs). 

A2M plans to significantly increase advertisement spending with a reported ‘high level of marketing investment’, with a ‘significant’ marketing campaign in China slated for 4Q21. To try and move its current oversupply of stock. The business recently wrote down $90 million in out-of-date stock. 

Due to the ongoing impact of coronavirus, we don’t see any significant return of revenues until the return of international travel and the easing of Australian-Chinese trade tensions. Although CEO David Bortolussi concluded that the company’s current challenges are simply ‘short-term setbacks.’ 

Should I Buy A2 Milk Shares: Investor Sentiment

After surveying 77 Investors about their current A2M shares sentiment: BUY-HOLD-SELL, as well as their target price over the next 12-months here are the results;

Should I Buy A2 Milk Shares, A2 Milk Shares Price, A2M ASX, A2M

The results from this survey show there is currently a strong BUY investor sentiment on A2M shares. So how much are A2M shares worth? Let’s get into it.

Should I Buy A2 Milk Shares: Fundamentals

Market Cap$4,460,464,740
Shares Issued743,410,790
ASX Rank110
PE12.2x
EPS$0.40
Volume 4W Avg6,864,385
VWAP$6.035
PEG0.7x
NTA per Share$1.45
ROE27%
Debt$0
Equity$1.187B
Should I Buy A2 Milk Shares Fundamentals

Based on the current fundamentals, at face value, A2M appears cheap. We see the PE ratio is 12.2x, below the market average of 15-20x. The ROE for the company has been impressive, they are also debt-free and have a book value of $1.45 per share.

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Should I Buy A2 Milk Shares: Financials

Historical Data

A2M has seen its revenues rise from $0.352B in FY16 to $1.732B in FY20, representing a CAGR of 48.9%. During the same period, the Company has seen a normalized net income CAGR of 88.9% and a free cash flow (FCF) CAGR of 113.4%, with most of the growth from their Chinese consumers.

Meanwhile, the Company boasts a return on equity between 30 to 50%, whilst being completely debt-free.

Half-Yearly

A2M released the following half-yearly highlights in February:

  • Total revenue of $677.4 million was down 16.0% and EBITDA of $178.5 million was down 32.2%.
  • Challenges resulting from COVID-19 disruption experienced in the daigou/reseller channel.
  • Strong performance in China label infant nutrition, with revenue growth of 45.2%, an increase in market value share to 2.4%.
  • Solid performance in liquid milk in Australia with 16.3% revenue growth driven by higher levels of in-home consumption and a record value share of 11.7%
  • Finalized binding agreements for the proposed acquisition of a 75% interest in Mataura Valley Milk (MVM), which will provide supply diversification, further strengthen relationships with key strategic partners in China, and offer access to manufacturing margins over time.

Income Statement

This is the income statement from the previous full year. Here we see excellent revenue growth to $1.7B, which has translated to a profit of $388 million, and an EPS of 52.71cps.

Balance Sheet

We can see that A2M has a strong balance sheet with $854 million cash in hand and no debt. Their net assets are $1.134B

Cash Flow Statement

Should I Buy A2 Milk Shares: Technicals

The general consensus within the Technical Analysis community is currently Bearish on A2M shares. The moving averages and Technical Indicators seem to indicate a Strong Sell.

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In summary, the short-term will rebound towards $6.63 before a new drop. The alternative scenario is that above $6.63 look for $7.08 and $7.35.

Here’s A Breakdown Of The Detailed Technical Factors;

NameValueAction
RSI38.824Sell
STOCH22.647Sell
STOCHRSI0.000Oversold
MACD-0.040Sell
ADX44.933Sell
Williams %R-96.774Oversold
CCI-149.5146Sell
ATR0.0771Less Volatility
Highs/Lows-0.0993Sell
Ultimate Oscillator25.099Oversold
ROC-3.448Sell
Bull/Bear Power-0.1740Sell
Source https://au.investing.com/equities/a2-corp-technical

Insider Ownership and Trading

We can see that A2M is largely owned by institutions (56.8%), and the general public (42.7%). Private companies own 0.1% of the company and individual insiders own only 0.4% which is disappointing for a relatively young, smaller company.

Substantial Holders:

NameTotal SharesHeld (%)
Vanguard51,494,5916.96%
BlackRock46,398,8146.25%
Mitsubishi UFJ Financial Group42,291,5915.69%

There has been substantial institutional trading in 2021, in both the buy and sell directions. There has been no individual insider trading.

DateNameBoughtNew %
21-05-21The Goldman Sachs Group, Inc.38,343,0455.16
10-05-21Morgan Stanley and its subsidiaries38,059,3665.12
05-05-21Morgan Stanley and its subsidiaries37,529,3875.05
20-04-21UBS Group AG and its related bodies corporate39,244,5045.28
25-02-21Morgan Stanley and its subsidiaries38,346,3415.16
04-02-21Morgan Stanley and its subsidiaries37,516,3285.05
20-01-21Morgan Stanley and its subsidiaries37,173,2015.01
20-01-21Mitsubishi UFJ Financial Group, Inc7,959,9988.53

Management

David Bortolussi is the CEO of A2M, assuming the role at the start of 2021. Bortolussi is renowned for growing brands and turning around troubled companies, making him an excellent fit for A2M. The management is currently expecting the daigou channel to resume when the uncertainty of the pandemic is over.

The China Story

The success of A2M is hard to grasp without first understanding China’s Infant formula epidemic. The issue started in 2008 after the official release of China’s Ministry of Health’s update, saying nearly 300,000 babies were sickened after consuming melamine-contaminated infant formula. 

Following this, it’s no surprise the Chinese consumers had severely lost confidence in the industry. As a result, the international import of infant formula moved to fill the massive void. Euromonitor reports that the market scale of China’s infant formula is worth $31.12 billion, this accounts for about 50 percent of the global market.  

In China consumers are also willing to pay a premium for quality international products, fetching around 22% extra on average.  

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This insane demand led to the famous montages all over Aussie news of daigou shoppers stripping supermarket shelves to export the product back to the Chinese consumers.  

China is a massive component to the success of A2 milk. Last half year A2 revealed further strong growth from their Chinese market with their China label infant nutrition products, with sales of $213.1 million, an increase of 45.2%. These sales account for just under half of the group’s revenues. 

However, after account for both direct and indirect sales systems to China accounting for the diagou and e-commerce sales, it is estimated that up to 80% of sales go to China. 

Pre-COVID  Daigou sales were fetching around $250M. With the international lockdown, this has practically ceased to 0. Diagou’s also benefited the brand through their own advertisement campaigns to sell the product. We can see how COVID has caused A2M to come to a grinding halt and destroyed the share price over the last 12-month. 

To further add to this, the initial COVID reaction caused a surge in demand for the product causing management to increase inventory. However, once the supply chain got disrupted this left the company with a tonne of expiring product they had to destroy at a loss of $90 million. 

Despise this A2M still holds a well-respected strong brand. Their market share has stayed constant, and even slightly grown during this tough period. 

Should I Buy A2 Milk: Future Prospects

A2M Flagging Aggressive Actions Till 1Q22 

In an update given to the market on 10th May 2021, the company (ATM.NZX A2M.ASX) flagged that they would be adopting more aggressive measures to address the excess inventory to be taken which will impact FY2021 revenue and EBITDA, and potentially 1Q22. 

This is worrying as A2M are flagging this impact to last until at least FY22, we think there may be some more pain in store for shareholders come their annual report in August. And more drops to come for the A2M share price ASX. 

It’s strange however, and this may suggest that the company is confident in a return to massive growth in the future also flagging on the 10th May:

“In addition, the Board is actively considering capital management initiatives, including a potential share buy-back and an update will be provided at the full-year results in August”. 

A2M Wanting To Start Manufacturing Their Own Products? 

On the 24th December 2020, A2M announced to the market that they have agreed to terms with Mataura Valley Milk to acquire a 75% interest. MVM is a New-Zealand based business. 

We believe this a significant strategic move for A2M, as A key feature of A2M’s proposed investment in MVM is that MVM’s current majority shareholder, China Animal Husbandry Group (CAHG), will retain a 25% interest in MVM alongside a2MC. CAHG is a wholly-owned subsidiary of China National Agriculture Development Group Co., Ltd, which is also the parent company of a2MC’s strategic logistics and distribution partner in China, CSFA Holdings Shanghai, Co., Ltd 

The Return of the China Consumer

Largely the future of A2’s massive growth is reliant on the return of the diagou channel as the global economy returns to normal.

the Australia-China relationship has put a damper to the prospect of future growth through the daigou channel since the relationship between the two countries began deteriorating in 2018 when a growing concern of political influence in various sectors of Australian society arose.

Should I Buy A2 Milk: Prophet’s take

It’s no secret that investors have been stung by the collapse of A2’s Share price, but this in itself isn’t a reason to avoid the company. Some of our greatest buys have been during tough times. 

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” 

Despite the barrage of downgrades and bad news, we can’t overlook the simple facts; 

  • Revenue is still expected to exceed $1 Billion (significantly higher than they were in 2017 at the current market cap, $500 Million) 
  • The Company is completely debt free and has significant cash on hand ($854 Million) 
  • In relation to their current PE (14.3) and book value of $1.45 the current share price is quite attractive 

We are closely monitoring A2M share price and are considering buying more shares. We did very well in the early days of A2M around the 2017/2018 mark. Our current holdings are down, but we see $6 as a hard price to resist. At the moment we will be standing on the sideline waiting for their full-year results in August. We are Undecided on A2M. Over the long term, we are BULLISH, but there may be more losses before then.  

Please Remember all Articles Published on Prophet Invest are Opinion only

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