Business Summary The A2 Milk Company Limited (A2M) is engaged in the commercialisation of intellectual property relating to a2 brand milk and related products in New Zealand, Australia, and the United Kingdom. A2M also sources, produces and supplies a2 brand milk and milk related products in Australia. The product comprises of Liquid Milk, Infant Formula and other dairy products which include Cream and Yoghurt. A2 Milk: A2 Milk is pure dairy milk which comes from cows specially selected to produce A2 beta-casein protein rather than A1. Products relating to a2 Milk include: A2 Full Cream Milk (full-bodied milk contains 4g of fat per 100mL); A2 Light Milk (contains all the full cream with 1.3g of fat per 100mL); No Fat a2 Milk (does not contain any fat); A2 Long Life Full Cream Milk (Contains 3.6g of fat per 100mL); a2 Jalna Natural Low Fat Creamy Yoghourt; semi-skimmed a2 Milk and a2 Whole (as an ingredient in cooking, on cereal). Latest Research Trading update inline with expectations A2M provided a trading update, upgrading EBITDA margin guidance while providing FY20e revenue guidance at a level broadly consistent with market expectations. Key points from the update are: FY20e Revenue guidance: revenue has exceeded internal expectations through the March quarter due in large to consumer stockpiling of staples, which at some point will normalise. Revenue for FY20e is forecast at NZ$1.70-1.75Bn and compares to our forecast of NZ$1.78Bn. EBITDA Margin guidance: FY20e EBITDA margin is forecast at 31-32%, up from previous guidance of 29-30% and compares to our forecast of 31.8%. The main driver of the upgrade has been the depreciation of the NZD and a shift in sales mix to IMF. This implies EBITDA of NZ$527-560m and compares to our forecast of NZ$568m. Marketing expenditure of ~NZ$200m is in line with our expectations. Medium term margin target: Improving margin guidance has been a feature for A2M over FY20e and changes to a large degree have been reflective of movements in the NZD relative to the AUD and USD. A2M has retained its 30% EBITDA margin target in the medium term, which looks reasonable given the material impact volatility in the NZD can have. For more information see research 23 Apr 2020. GICS - Food/Beverage/Tobacco The a2 Milk Company Limited ASX Code: A2M Price: $17.96 12 Mth Target Price: $17.70 Rating: Hold Important Disclaimer - This may affect your legal rights: Because this document has been prepared without consideration of any specific client's financial situation, particular needs and investment objectives, a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the proper authority of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. This is general investment advice only and does not constitute advice to any person. Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended. Snapshot Date Market Cap. Shares on issue 12 Month High 12 Month Low 24 June 2020 $13,287m 739.8m $20.05 $11.28 Rating Rating 12 Mth Target Price Capital Gain Gross Yield Implied Total Return Hold $17.70 -1.5% 0.4% -1.0% Investment Fundamentals FYE 30 Jun 2019A 2020F 2021F 2022F Profit $m 288.0 396.8 421.9 484.3 Profit (norm)* $m 288.0 396.8 421.9 484.3 EPS* ¢ 38.9 53.4 56.7 65.1 EPS Growth % 46.9 37.1 6.2 14.8 P/E* x 46.1 33.6 31.7 27.6 P/E Relative % 0.0 0.0 0.0 0.0 DPS ¢ 0.0 0.0 5.0 5.0 Yield % 0.0 0.0 0.3 0.3 Franking % 0.0 0.0 100.0 100.0 * Adjusted for goodwill and unusual items Source: Based on Bell Potter estimates Share Price Chart Total Return on $10,000 Investment
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Business SummaryThe A2 Milk Company Limited (A2M) is engaged in the commercialisation ofintellectual property relating to a2 brand milk and related products in NewZealand, Australia, and the United Kingdom. A2M also sources, producesand supplies a2 brand milk and milk related products in Australia. Theproduct comprises of Liquid Milk, Infant Formula and other dairy productswhich include Cream and Yoghurt.
A2 Milk: A2 Milk is pure dairy milk which comes from cows specially selectedto produce A2 beta-casein protein rather than A1. Products relating to a2 Milkinclude: A2 Full Cream Milk (full-bodied milk contains 4g of fat per 100mL);A2 Light Milk (contains all the full cream with 1.3g of fat per 100mL); No Fata2 Milk (does not contain any fat); A2 Long Life Full Cream Milk (Contains3.6g of fat per 100mL); a2 Jalna Natural Low Fat Creamy Yoghourt;semi-skimmed a2 Milk and a2 Whole (as an ingredient in cooking, on cereal).
Latest ResearchTrading update inline with expectations
A2M provided a trading update, upgrading EBITDA margin guidance whileproviding FY20e revenue guidance at a level broadly consistent withmarket expectations. Key points from the update are:
FY20e Revenue guidance: revenue has exceeded internal expectationsthrough the March quarter due in large to consumer stockpiling of staples,which at some point will normalise. Revenue for FY20e is forecast atNZ$1.70-1.75Bn and compares to our
forecast of NZ$1.78Bn.
EBITDA Margin guidance: FY20e EBITDA margin is forecast at 31-32%,up from
previous guidance of 29-30% and compares to our forecast of 31.8%. Themain driver of the upgrade has been the depreciation of the NZD and ashift in sales mix to IMF. This implies EBITDA of NZ$527-560m andcompares to our forecast of NZ$568m.
Marketing expenditure of ~NZ$200m is in line with our expectations.
Medium term margin target: Improving margin guidance has been a featurefor A2M over FY20e and changes to a large degree have been reflective ofmovements in the NZD relative to the AUD and USD. A2M has retained its30% EBITDA margin target in the medium term, which looks reasonablegiven the material impact volatility in the
NZD can have.
For more information see research 23 Apr 2020.
GICS - Food/Beverage/Tobacco
The a2 Milk Company Limited
ASX Code: A2M Price: $17.96 12 Mth Target Price: $17.70 Rating: Hold
Important Disclaimer - This may affect your legal rights: Because this document has been prepared without consideration of any specific client's financial situation, particular needs and investmentobjectives, a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the proper authority of such licensee, who has provided you with this report by arrangement withBell Potter Securities Limited) should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell PotterSecurities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate.Nor does Bell Potter Securities Limited accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document.This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. This is generalinvestment advice only and does not constitute advice to any person.Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in thiscommission. Bell Potter Securities and its associates may hold shares in the companies recommended.
Snapshot
DateMarket Cap.Shares on issue12 Month High12 Month Low
24 June 2020$13,287m739.8m$20.05$11.28
RatingRating12 Mth Target Price
Capital GainGross Yield
Implied Total Return
Hold$17.70-1.5%0.4%-1.0%
Investment FundamentalsFYE 30 Jun 2019A 2020F 2021F 2022F
Profit $m 288.0 396.8 421.9 484.3Profit (norm)* $m 288.0 396.8 421.9 484.3
EPS* ¢ 38.9 53.4 56.7 65.1EPS Growth % 46.9 37.1 6.2 14.8P/E* x 46.1 33.6 31.7 27.6P/E Relative % 0.0 0.0 0.0 0.0
DPS ¢ 0.0 0.0 5.0 5.0Yield % 0.0 0.0 0.3 0.3Franking % 0.0 0.0 100.0 100.0* Adjusted for goodwill and unusual itemsSource: Based on Bell Potter estimates
Share Price Chart
Total Return on $10,000 Investment
Profit & Loss ($M)2015A 2016A 2017A 2018A 2019A
Sales Revenue 137 336 523 846 1,247Total Revenue ex. Int. 137 336 523 846 1,247EBITDA 3 52 135 260 397Depreciation & Amort. -2 -3 -3 -2 -2Goodwill Amortisation -- -- -- -- --EBIT 1 50 132 258 395Net Interest 0 0 1 2 4Profit Before Tax 1 50 133 260 399Income Tax -3 -21 -46 -80 -122Outside Equity Int. -- -- -- -- --Profit after Tax -2 29 86 179 277Significant Items after Tax -- -- -- -- -2Reported Profit after Tax -2 29 86 179 275Preferred Dividends -- -- -- -- --
Cash Flow ($M)2015A 2016A 2017A 2018A 2019A
Receipts from Customers 128 326 499 851 1,260Funds from Operations -5 29 124 273 400Net Operating Cashflow -7 20 95 212 276Capex -3 -2 -2 -4 -3Acquisitions & Investments -- -- -46 -15 -155Sale of Invest. & Subsid. -- -- -- -- --Net Investing Cashflow -3 -2 -49 -19 -158Proceeds from Issues 0 42 4 7 3Dividends Paid -- -- -- -- --Net Financing Cashflow 0 42 4 7 3Net Increase Cash -10 61 50 199 121Cash at Beginning 14 6 66 111 325Exchange Rate Adjust. 2 -0 -1 2 -2Cash at End 5 66 115 312 444
Ratios and Substantial Shareholders2015A 2016A 2017A 2018A 2019A
Profitability RatiosEBITDA Margin % 2.07 15.53 25.72 30.70 31.88EBIT Margin % 0.81 14.75 25.23 30.47 31.71Net Profit Margin % -1.35 8.63 16.50 21.22 22.22Return on Equity % -3.57 22.87 37.54 35.21 36.78Return on Assets % -2.25 14.55 26.38 27.09 29.18
Debt/Safety RatiosNet Debt/Equity % -10.39 -52.12 -50.12 -61.26 -59.00Interest Cover x -63.05 -175.09 -184.31 -125.95 -99.45
Top 5 Substantial ShareholdersThe Vanguard Group,Inc 7.0%Mitsubishi UFJ Financial Group, Inc 6.4%Commonwealth Bank of Australia 6.3%Pendal Group Limited 6.3%UBS Group AG and its related bodies corporate 5.5%
Balance Sheet ($M)2015A 2016A 2017A 2018A 2019A
Cash & Equivalent 5 66 115 312 444Receivables 35 43 69 60 50Inventories 4 50 27 59 104Other Current Assets 9 14 34 33 47Current Assets 54 174 246 464 646Prop. Plant & Equipment 8 8 8 9 10Intangibles 15 16 13 14 12Other Non-Current Assets 9 14 34 33 47Non-Current Assets 25 26 82 199 304Total Assets 79 200 328 663 950Interest Bearing Debt -- -- -- -- --Other Liabilities 27 73 98 153 197Total Liabilities 27 73 98 153 197Net Assets 52 127 230 510 753Share Capital 76 124 128 130 138Reserves -1 -2 12 113 62Retained Earnings -23 4 90 267 553Outside Equity Int. -- -- -- -- --Total Shareholders Equity 52 127 230 510 753
Current Analyst Recommendations *
* Source: Morningstar. This chart shows the spread of recommendations from thosebroker analyst's in Australia with research coverage of this stock.
Principals & DirectorsPrincipals
Company Secretary Mr Jaron McVicar
Directors
Mr Geoffrey Babidge(Interim Chief Executive Officer)Mr Warwick Lynton Every-Burns(Non-Executive Director)Ms Julia Hoare(Non-Executive Deputy Chairman,Non-ExecutiveDirector)Mr David Hearn(Executive Director,Executive Chairman)Mr Jesse Jen-Wei Wu(Non-Executive Director)Ms Philippa (Pip) Mary Greenwood(Non-Executive Director)
To access further Research or for information regarding our recommendations and ratings please seewww.bellpotter.com.au
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The a2 Milk Company Limited
Bell Potter Securities Research
AFS Licence No. 243480 ABN 25 006 390 772
Email [email protected]
Website www.bellpotter.com.au
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