The a2 Milk Company - Macquarie...The a2 Milk Company Flawless execution Event A2M reported its 1H18 result with EBITDA of $143m, 19% ahead of our , and NPAT of $99m (Macq $78m). Net

Please refer to page 11 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

A2M AU Outperform

Price (at 05:10, 21 Feb 2018 GMT) A$11.30

Valuation A$ 11.04 - DCF (WACC 9.1%, beta 0.9, ERP 7.0%, RFR 4.5%, TGR 2.0%)

12-month target A$ 13.00

12-month TSR % +16.0

Volatility Index Medium

GICS sector Food, Beverage & Tobacco

Market cap A$m 8,255

30-day avg turnover A$m 46.7

Number shares on issue m 730.5

Investment fundamentals Year end 30 Jun 2017A 2018E 2019E 2020E

Revenue m 549.5 965.6 1,340.3 1,630.5 EBIT m 138.6 294.2 420.6 542.9 Reported profit m 90.6 205.2 295.1 381.5

Adjusted profit m 90.6 205.2 295.1 381.5 Gross cashflow m 93.3 207.9 298.4 384.7 CFPS ¢ 12.7 28.2 40.5 52.2 CFPS growth % 170.4 121.7 43.5 28.9 PGCFPS x 95.4 43.1 30.0 23.3 PGCFPS rel x 8.84 4.26 2.99 2.50 EPS adj ¢ 12.3 27.8 40.0 51.7 EPS adj growth % 186.5 125.3 43.8 29.2 PER adj x 98.3 43.6 30.3 23.5 PER rel x 5.82 2.74 1.95 1.60 Total DPS ¢ 0.0 0.0 20.0 28.4 Total div yield % 0.0 0.0 1.6 2.3 Franking % nmf nmf 0 0

ROA % 50.0 58.1 54.7 55.7 ROE % 48.4 55.5 51.4 51.6 EV/EBITDA x 61.9 29.3 20.6 15.9

Net debt/equity % -50.1 -57.3 -62.4 -66.5 P/BV x 37.2 18.0 13.8 10.8

A2M AU vs ASX 100, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, February 2018

(all figures in NZD unless noted, TP in AUD)

22 February 2018

The a2 Milk Company Flawless execution Event

A2M reported its 1H18 result with EBITDA of $143m, 19% ahead of our

forecast, and NPAT of $99m (Macq $78m). Net cash at 1H18 was $240m.

A2M and Fonterra announced a comprehensive strategic relationship

covering a number of products and markets.

Impact

Strong top line growth: Revenue came in 5% ahead of expectations at

$435m, up by 70% on pcp, underpinned by improved distribution and brand

awareness, strong key sales events and better inventory availability.

Significant improvement in EBITDA margins: This increased 7.8% to

32.9% reflecting GM benefits and fixed cost operating leverage. The last two

months were particularly strong at 37.5%. A2M flagged marketing spend

would increase NZ$35-40m in 2H vs. 1H from China and USA, which may

drag a little on margin in 2H18, but drive revenue benefits in FY19+.

Annualising share provides strong base: China market share increased to

5.4%, up 190bp in the last six months. Annualising current share compared to

pcp gives 77%/31% volume growth in 2H18/19E before market growth (we

think 5-10%), pricing (~3% p.a.) and share gains. This gives us comfort in our

99% and 46% IF revenue growth (vs. pcp) for these periods respectively.

Capacity constraints closer in FY19: With higher volumes and growth,

production constraints may be a concern. We estimate SML are utilising

~70% of A2 milk supply (hence ~40% production growth to fully utilise), and

currently are looking for new suppliers for 2018/19 season. Current ramp in

SML’s new canning line we think removes processing capacity risk.

Fonterra partnership to accelerate roll-out: This partnership covers a

number of products and markets, but we think the first priority is launch of

infant formula into SE Asia. a2MC will leverage Fonterra’s resources and

execution capability when entering new markets, which helps increase speed

to market and lowers risk for a2MC in our view.

Pregnancy formula announced: This is a logical extension to a2MC’s infant

offering and fits well in the key channels. a2MC are still investigating new

product opportunities for USA to leverage distribution and brand awareness.

Earnings and target price revision

EPS: FY18E +26%, FY19E +32%. PT to A$13.00 (from $8.29) reflecting

increased share and margin, and accelerated product/market roll out (SE

Asia).

Price catalyst

12-month price target: A$13.00 based on a PER methodology.

Catalyst: New product and market launches

Action and recommendation

Maintain OP. Operational momentum is clearly strong, and the Fonterra

relationship will help accelerate new products and markets to drive higher

growth. We still see some blue sky from turning this into a truly global brand,

and accordingly view A2M as an attractive acquisition target. On our revised

forecasts, A2M is on ~29x FY19E PER (ex USA losses) which we see as

undemanding given growth, net cash, low capital requirement and high ROE.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management The a2 Milk Company

22 February 2018 2

Fig 1 1H18 result wrap

The good The not so good The interesting

A2M’s result came in significantly ahead of

expectations, with EBITDA of $143m (19% ahead

of Macq) and NPAT of $99m (27% ahead of

Macq) This was underpinned by both strong top

line as well as improved margin from operating

leverage, meaning a high quality beat.

China market share (based on Kantar data used

by A2M) increased to 5.4% at 31/12/17, which

compares to 4.1% in Mid-Sept and 3.5% in June.

This shows an acceleration in share gains

(+130bp over three months). Infant formula

market share in Australia has increased from

26% to 30% in the last six months.

a2MC have announced the expected launch of a

maternal / pregnancy product in 2HFY18 (we had

previously flagged this incremental opportunity),

which has had good feedback from presentation

to trade. We think this will be incrementally

positive and fits well into its existing product

offering and distribution channels.

Cash generation was strong, with operating cash

flow of $116m, reflecting strong working capital

management despite inventory build. This

increased cash balance to $240m which provides

significant flexibility around investment, growth

and distribution to shareholders.

A2M and Fonterra announced a comprehensive

strategic relationship covering a number of

products and markets to facilitate further growth

in a2MC branded products. We think this both

allows for an acceleration of strategy (such a roll

out of infant formula into SE Asia) as well as a

defensive move through increased speed to

market should there be threats of other

companies trying to launch an A1-free product.

While infant formula remains a key focus, “other

products” which is primarily adult milk powder

grew by 124%, while liquid milk grew by 14% with

launch in Singapore and growth in HK (Aus +3%).

A2M noted that January has been a strong

period, and that they expect 2H18 to be stronger

than 1H18 in terms of revenue given share gains,

and despite the usual market seasonality around

key sales events.

MBS store footprint increased to 6,700, up from

5,800 in November. This remains key to building

brand awareness, as well as the direct sales from

this channel (still biggest sales channel in China).

Despite the significant growth in sales, A2M also

managed to retain some volume as inventory,

with finished goods on hand increasing to $44m

from $10m at FY17. This is working towards a

more sustainable level of inventory.

Soft disclosure continues to be a challenge for us,

for example, details around price increases

achieved to help understand revenue/margin

movement. We would have liked to see more

details around potential new products to be

launched into the USA but this remains in the

works. We still suspect this would be a functional

healthy living/aging product to leverage a2MC’s

increasing brand awareness and distribution.

Guidance was for increased marketing spend in

2H to NZ$35-40m (from $30m) above 1H which

will drag on 2H EBITDA margin, while revenue

growth benefits are unlikely until FY19+.

Despite the significant cash build over 1H and

expected strong cash generation in 2H, the Board is

yet to make a move on capital management. The

Board is assessing a potential investment in

blending and canning, however, we estimate this

would be ~NZ$50-60m (based on SML’s last facility

of ~32k MT), so A2M would still have ample cash.

Interestingly, the Board is considering the

implementation of a dividend policy, vs. previously

not considering it noting reluctance of having a

permanent dividend policy given cash needs may

change over time.

In SML’s recent farmer update, it noted future A2

supply possibilities, keen to discuss possible A2

herd formation for next season (starting June-18).

We think this reflects the significant ramp in

production required to meet a2MC’s demand. We

think around 70% of A2 milk collection (total 200m

litres) is being utilised this season so has room for

~40% growth in FY19. That said, new products like

maternal formula may consume some of this.

a2MC noted that it had tested some competitor

products in other markets claiming to be A2, and

that these were not completely A1-free. The

company is looking to enforce IP accordingly here.

When asked about the Lion settlement,

management reiterated it remains confidential but

both parties are happy. We still wonder whether

Lion will need to remove “naturally contains A2

protein” from its label.

Legal expenses increased from $1.8m to $3.9m in

1H18, which we think reflects increased

development and enforcement of IP.

The new CFDA registered China label product is

expected to start selling in 4QFY18, and the

increased marketing spend (+$30m in China vs.

1H) will be to help relaunch this and grow

awareness for a2MC’s MBS strategy. China label

sales were 12% of total infant sales in 1H18, up

from 8% in 2H17.

Within the segmental reporting, assets in China and

other Asia grew by $75m to $184m, reflecting

increased infant formula inventory and

prepayments.

A2M are testing the Vietnamese market with a milk

powder product as it assess market opportunities in

SE Asia.

Despite the new partnership with Fonterra, new

product innovation still sits with the Synlait

relationship. We think this could cover other

nutritionals (such as upcoming maternal) or liquid

innovation such as ready-to-drink infant formula.

A2M have locked in key accounts for the North East

expansion, and noted that every outlet objective set

out has been achieved, which shows the positive

response to the brand.

Source: Company data, Macquarie Research, February 2018


22 February 2018 3

EBITDA beat of 19% driven by higher top line and operating leverage

A2M delivered total revenue of $434.7m in 1H18, around 5% ahead of our forecast, underpinned

by improved distribution and brand awareness, as well as better inventory availability from larger

orders. Given A2M had previously provided revenue for the first 4 months of 1H18, the beat in the

last two months was even higher, reflecting success for key sales days (11/11 and 12/12).

Gross profit was $216.6m, around 9% higher than forecast. GM came in at 49% (Macq 48%), up

on 1H17 and flat on 2H17, despite A2M guiding to some GM pressure over the year. Mix, currency

and favourable selling prices assisted here, and GM is expected to be consistent in 2H.

Expenses were broadly consistent with expectations, which was for reasonably significant growth

given top line increases, but other expenses were lower reflecting the asset impairment in 1H17

($2.4m) and other favourable movements such as lower consultancy costs.

With higher gross margin and solid cost control, EBITDA came at $143.1m or around 19% ahead

of our forecast, and up 123% on pcp. We note that this 1H18 figure is higher than the full FY17.

Group EBITDA margin expanded 7.8% to 32.9%, and 3.8% ahead of our forecast.

Interest income was slightly below our forecast despite higher cash balance, reflecting lower rates

on deposits. Effective tax rate was 31%, lower than our forecast of 35%, reflecting A2M having a

lower weighting to non-deductable tax losses and expenses compared to previous periods. We

have tax rate at ~31% long term.

Accordingly, NPAT was $98.5m, around 27% ahead of our forecast.

No guidance provided for FY18 but A2M expects revenue growth in 2H, higher expected

marketing spend, constant GM and continued inventory build.

Fig 2 1H18 result summary – 19% EBITDA beat

$m 1H17A 1H18E 1H18A % vs. Macq % change

Total revenue 256.1 412.4 434.7 5% 70% Cost of goods sold 137.0 214.5 218.2 2% 59% Gross profit 119.1 198.0 216.6 9% 82% Administrative expenses 13.7 20.7 21.8 5% 59% Marketing expenses 16.0 26.5 26.0 -2% 62% Occupancy expenses 0.8 0.9 1.0 3% 25% Other expenses 26.1 31.4 25.8 -18% -1% Total expenses 56.6 79.6 74.6 -6% 32% EBIT 62.5 118.4 142.0 20% 127% Depreciation and Amortisation 1.6 1.6 1.1 -35% -34% EBITDA 64.2 120.0 143.1 19% 123% Interest income 0.4 1.2 0.8 -32% 79% Interest expense 0.1 0.0 0.1 - -11% PBT 62.9 119.6 142.7 19% 127% Associates 0.0 0.0 0.0 - - Tax 23.5 41.9 44.3 6% 88% NPAT 39.4 77.7 98.5 27% 150% EPS 5.4 10.6 13.3 25% 144% DPS 0.0 0.0 0.0 - -


Looking closer at the operating segments and metrics, A/NZ revenue of $304.3m was around 5%

below our forecast, while China and other Asia was 56% ahead at $114.4m. This reflect shift in

channel a little (albeit A/NZ still up 47% on pcp) toward direct and cross-border e-commerce.

USA/UK revenue of $16m was a little below our expectations.

Infant formula saw around 85% growth on pcp to $341m and was 7% ahead of expectations, and

represented 78% of revenue. While infant formula remains a key focus, “other products” which is

primarily adult milk powder grew by 124%, while liquid milk grew by 14% with launch in Singapore

and growth in HK (Aus +3%).

EBITDA in A/NZ was up 65% to $116.4m on the back of 47% revenue growth, with margins

growing by 4.2% to 38.2%, and around 1.1% ahead of our forecast. China and other Asia saw

EBITDA up 253% to $48.3m, and margins expanded 13% to 42.3%.


22 February 2018 4

US and UK losses were $8.4m, broadly consistent with our forecast. This will grow into 2H18 as

a2MC invest in marketing to support the North Eastern launch, and the company has maintained

expectation for US$25m of investment before monthly breakeven in FY20.

Fig 3 Summary of operating segment revenues and margins


ANZ 206.6 321.0 304.3 -5% 47% China and Asia 37.7 73.3 114.4 56% 204% USA and UK 11.8 18.2 16.1 -12% 37% Total revenue 256.0 412.4 434.7 5% 70% Infant formula 184.5 317.5 341.0 7% 85% Liquid milk 60.8 - 69.4 - 14% Other products 10.9 - 24.4 - 124% Gross profit 119.1 198.0 216.6 9% 82% Gross margin 46.5% 48.0% 49.8% 1.8% 3.3% EBITDA

Australia & NZ 70.4 119.1 116.4 -2% 65% China and other Asia 13.7 27.7 48.3 75% 253% UK and USA -7.7 -8.2 -8.4 3% 9% Corporate and other -12.3 -18.6 -13.4 -28% 9% Total EBITDA 64.1 120.0 142.9 19% 123% EBITDA margin

Australia & NZ 34.1% 37.1% 38.2% 1.1% 4.2% China and other Asia 36.4% 37.8% 42.3% 4.5% 5.9% UK and USA -65.5% -45.0% -52.5% -7.5% 13.0% Corporate and other -4.8% -4.5% -3.1% 1.4% 1.7% Group margin 25.0% 29.1% 32.9% 3.8% 7.8%


Operating cash flow was strong at $116.4m which was well ahead of our expectation. This was

driven by strong working capital management, with net working capital declining over the period

with increased payable (albeit ~$20m noted to payment timing) even with inventory build. Pre

interest and tax cash conversion was 113%.

Over 2H, a2MC noted the timing impact will reverse somewhat, and it aims to further build

inventory towards a sustainable level.

Fig 4 Strong cash flow conversion sees cash balance grow to $240m


Trade and other receivables 67.9 98.5 75.4 -23% 11% Inventories 30.0 74.0 53.6 -28% 79% Prepayments 17.6 47.5 46.4 -2% 163% Gross working capital 115.5 219.9 175.4 -20% 52% Trade and other payables 59.8 101.7 123.5 21% 106% Net working capital 55.6 118.2 51.9 -56% -7% Cash and cash equivalents 108.4 131.4 240.2 83% 122% Operating cash flow 38.1 27.0 116.4 331% 205% Cash flow conversion (pre interest & tax)

97% 56% 113% 57% 16%


Cash balance accordingly increased materially to $240m. The Board are looking at the opportunity

for investment (alone or under JV) in blending and canning (see later), as well as potential

buybacks and/or implementation of a dividend policy. This is a change from the previous result,

announcing a $40m buyback (which was never conducted) and noting reluctance of having a

permanent dividend policy given cash needs may change over time.


22 February 2018 5

Last two months had significant sales run rates, and strong base for 2H18

A2M reported revenue of $262m for the first 4 months of 1H18, implying a run rate of $66m per

month. A further $173m of revenue was generated in 2H18, reflecting a jump in the run rate to

$86m/month up 73% on the previous period. This partially captured strong performance in key

sales events but also increasing market share.

Over 2H18E, we forecast A2M to increase run rate from this base (to $89m/month), given the

share position it has generated. This will also be aided by further growth in products and markets

outside of infant formula (e.g. USA North Eastern launch).

China market share (based on Kantar data used by A2M) increased to 5.4% at 31/12/17, which

compares to 4.1% in Mid-Sept and 3.5% in June. This shows an acceleration in share gains

(+130bp over three months) reflecting improved distribution, brand awareness and inventory

availability. Increased distribution (now 6,700MBS vs. 5,800 in Nov) and higher order profile into

2H18 should help drive further growth.

Fig 5 A2M had $86m/month revenue in Nov/Dec… Fig 6 …while China market share grew to 5.4% at Dec

Source: Company data, Macquarie Research, February 2018 Source: Company data, Macquarie Research, February 2018

Using the share data that A2M has provided, we estimate the impact of annualising the gains

made at the end of 1H18 into 2H18 and 1H19. We estimate that in the 2H17A, a2MC’s infant

share in China was ~3.1%, and assuming current share holds (i.e. no further growth), the

annualisation impact should be around 77% growth in sales for 2H18E. Similarly for 1H19E, this

comes in at around 31% growth.

Fig 7 2H18 IF growth should be ~85-90% before share gains

1H18 2H18 1H19

Average pcp share 2.4% 3.1% 4.1% Current share 4.1% 5.4% 5.4% Annualisation impact 75.9% 77.0% 30.6% Market growth 7.5% 7.5% 7.5% Pricing 3.0% 3.0% 3.0% Base growth 94.8% 96.0% 44.7% Share of sales to China* 92.5% 92.5% 92.5% IF product growth 87.6% 88.8% 41.3% China share gain 0.5% 1.0% Potential growth 105.6% 66.1% Macq forecast growth 98.6% 45.9%

*Remaining 7.5% assumed domestic Australian & NZ consumption and hence not growing at same pace


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China IF share Quarterly change (RHS)


22 February 2018 6

On top of this, the market will continue to grow, with market volumes expected to be up ~5-10%

p.a. across the next few years. Further, the segment and channel which a2MC are targeting, being

super premium and online, is currently growing faster than the market, and this is expected to

continue medium term given premiumisation trend.

We think a2MC will continue to look for opportunities to take pricing growth, which we

conservatively estimated to be ~3% per annum (constant FX). Compounding these factors would

indicate ~96% growth in 2H18E and 45% in 1H19E before share gains. This needs to be down-

weighted slightly for the fact that product sold for domestic consumption will not experience this

growth (we estimate ~5-10% so have taken mid-point of sales but no data here).

a2MC will be looking to build further market share as it grows its distribution, marketing spend and

brand awareness. Adding around 0.5% share on average in 2H18 would take growth to around

106% and 1.0% share gain (cumulative, i.e. a further 0.5% on 2H18) for 1H19 would take growth

to around 66%. This compares to our forecast of 99% and 46% respectively, and hence despite

significant upgrades, we view our forecasts as achievable.

EBITDA margin beat; close to 35% excluding USA losses

A2M reported a significant increase in EBITDA margin to 32.9% in 1H18, vs 26.3% in 2H17A and

25.1% in 1H17A.

After reporting $78.4m of EBITDA in the first 4 months of the period, or 29.9% margin, the implied

margin for the remaining two months was around 37.5%. This clearly benefited from a higher

share of infant and operating leverage.

We note that a2MC reported $8.4m of losses in USA/UK. Excluding the impact of this, EBITDA

margin was around 34.8% for 1H18A.

Fig 8 Significant margin expansion in 1H18

1H17A 2H17A 1H18A First 4

months Last 2

months Six months Six months First 4

months Last 2

months Six months

Revenue 155.2 100.8 256.0 293.4 262.2 172.5 434.7 EBITDA 35.5 28.7 64.2 77.1 78.4 64.7 143.1 Margin 22.9% 28.4% 25.1% 26.3% 29.9% 37.5% 32.9% Add: asset impairment 2.4 - - Underlying EBITDA 66.6 - - Margin 26.0% - - Underlying EBITDA excluding USA/UK

74.3 91.9 151.5

Margin 29.0% 31.3% 34.8%


We have EBITDA margins coming off ~3.5pp to 29.3% in 2H18 reflecting the expected increase in

marketing spend flagged by A2M. This is likely to drag on 2H18 given the timing of spend being in

4QFY18 in relation to the launch of the new label for the China product (post CFDA), and hence

the revenue benefits will be largely from FY19+.

We expect gross margins to see a small increase in mix towards infant formula before significant

growth in fresh (USA) and non-infant products (such as maternal formula or adult). a2MC will see

further scale benefits from its sourcing from SML as it increases utilisation of new capacity, noting

the new canning facility is running at <25% we think.

We think a2MC will continue to benefit from operating leverage in its cost base as additional scale

is achieved. Marketing expenses will be the key area of growth, while other operating cost lines

should grow slower than revenue. Corporate overheads have decreased from 4.8% of revenue in

1H17 to 3.1% in 1H18.


22 February 2018 7

Fonterra partnership to accelerate roll-out; SE Asia first step we think

At the AGM, A2M noted it is seeking increased flexibility and diversification of supply chain, and

accordingly has announced a relationship with Fonterra. This agreement is on a rolling three-year

term, similar to other supply arrangements. This includes a number of different areas including:

Nutritional products manufacturing and supply agreement: Fonterra will exclusively

supply A1 protein free milk products in both bulk powder form and consumer packaged to

a2MC. This covers certain nutritional products for sale in certain new markets including SE

Asia and Middle East. These will be manufactured at Darnum in VIC, Australia and will be

canned at Canpac in Hamilton, NZ. Product supply from Darnum is expected to commence

during CY19.

NZ fresh milk licence: Fonterra has entered into an exclusive licensing agreement for the

production, distribution, sale and marketing of a2 Milk branded fresh milk in NZ. a2MC will

provide Fonterra with the systems and know-how relating to sourcing, processing and

marketing of a2 Milk. No detail on licence fees but we think these tend to be 5-10%.

Distribution and sales arrangements: This covers potential for new market entries where

Fonterra has resources and execution capability.

Exclusive period to explore a2MC branded butter and cheese, and China sourced liquid

milk: This is under evaluation and would before the sale of certain A1 free products (more

traditional products not presently marketed by a2MC) in Australia, New Zealand and China.

Packaging facility to be explored: a2MC are considering an investment in a blending and

canning facility, a2MC and Fonterra may look to do this under a JV in Australia.

Development of A1 protein free milk pool: To facilitate this agreement, Fonterra will

develop a milk pool in Australia and New Zealand.

We think this endorses the product proposition, however, for Fonterra, does not discredit existing

bulk and branded product offering (i.e. standard milk) given it remains under a2MC’s brand.

This provides a2MC with a second manufacturer to support ongoing growth and provide

diversification of supply base.

Given Synlait will likely reach capacity in its current facilities in the next few years through growth

in a2 Platinum infant formula volumes for China, plus its other brands, it is unlikely SML would

have been able to facilitate nutritional volumes for a2MC’s SE Asia strategy. The Fonterra

partnership unlocks volume in order to pursue this growth opportunity for a2MC.

We also view this partnership as a defensive move by a2MC against other competitors who may

be looking to develop A1 free products given improved speed to market and access a2MC will

have under the relationship.

Per the analysis in our initiation report (see pages 44-45), the SE Asian infant formula market is

estimated to be ~US$6b per annum, roughly 1/3 of the size of China.

Fig 9 South East Asian IF markets ~US$6b Fig 10 Retail distribution channels in SE Asia

Source: Coriolis, Macquarie Research, February 2018 Source: Coriolis, Macquarie Research, February 2018

0

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Indonesia Vietnam Philippines Thailand Malaysia Singapore

US$mConvenience

7%

Hypermarket19%

Supermarket21%

Chemist/other non-food

20%

Traditional grocery

33%


22 February 2018 8

Significant earnings revisions given revenue and margins

Following the strong result in 1H18, we have revised our forecasts. Our revenue in FY18

increases by 11% to $966m, and FY19E increases 23% to $1,340m. This is underpinned by

increased market share achieved, which provides for significant growth when annualised, plus

assumed further modest share gains by a2MC over the next few years.

Our EBITDA forecasts have increased by 19% and 27% in FY18/19 respectively from a

combination of higher revenue and improved margin outlook.

EPS increases by 26% and 32% respectively, from higher EBITDA as well as a2MC normalising

tax to 31% quicker than previously anticipated. We assume a reasonable dividend to be paid in

FY19 given the significant cash position that will be built.

Fig 11 Earnings revisions; FY18 +27%, FY19 +33%

FY18E FY19E FY20E Previous Current % change Previous Current % change Previous Current % change

ANZ 668.6 646.7 -3% 781.9 835.5 7% 871.5 921.3 6% China and Asia 160.3 279.7 75% 237.2 433.0 83% 306.3 603.6 97% USA and UK 41.3 39.2 -5% 71.9 71.9 0% 105.6 105.6 0% Total revenue 870.2 965.6 11% 1,091.0 1,340.3 23% 1,283.4 1,630.5 27% Australia & NZ 247.3 246.5 0% 295.1 322.1 9% 333.6 354.6 6% China and other Asia 62.3 104.5 68% 98.0 157.0 60% 132.6 234.3 77% UK and USA -22.1 -24.6 12% -15.4 -15.4 0% 4.1 4.1 0% Corporate and other -37.8 -29.7 -21% -44.7 -39.8 -11% -51.3 -46.8 -9% Total EBITDA 249.7 296.7 19% 332.9 423.8 27% 418.9 546.2 30% Margin 28.7% 30.7% 2% 30.5% 31.6% 1% 32.6% 33.5% 1% EBIT 246.5 294.2 19% 329.7 420.6 28% 415.6 542.9 31% PBT 249.1 297.4 19% 334.3 427.8 28% 422.3 552.9 31% NPAT 161.9 205.2 27% 222.3 295.1 33% 287.1 381.5 33% EPS 22.1 27.7 26% 30.4 40.0 32% 39.2 51.7 32% DPS 0.0 0.0 - 15.2 20.0 32% 21.6 28.4 32%


Our price target increases to A$13.00/share (from A$8.29) reflecting increased share and margin,

and accelerated product/market roll out (SE Asia).

Based on our revised forecasts, we have A2M trading on ~29x PER in FY19E (excluding USA

losses) which we see as undemanding. A2M has traded on ~33x forward PER over the last six

months, and we see the growth profile strengthening of late given execution and acceleration of

strategy likely to occur from the Fonterra partnership.

Fig 12 Forward PER ~33x on average in the last 6 months

Fig 13 On our revised forecasts, A2M is on ~29x FY19 PER ex USA losses which we see as undemanding

Source: Bloomberg, Macquarie Research, February 2018 Source: Company data, Macquarie Research, February 2018

15

20

25

30

35

40

45

Mar-

16

Apr-

16

May-1

6

Ju

n-1

6

Ju

l-16

Aug

-16

Sep

-16

Oct-

16

No

v-1

6

De

c-1

6

Ja

n-1

7

Feb

-17

Mar-

17

Apr-

17

May-1

7

Ju

n-1

7

Ju

l-17

Aug

-17

Sep

-17

Oct-

17

No

v-1

7

De

c-1

7

Ja

n-1

8

Feb

-18

12m forward PER

At share price (A$11.30) FY18E FY19E FY20E

EV/EBITDA 29.5x 20.2x 15.5x

- ex UK/USA losses 27.2x 19.5x 15.5x

PER 43.2x 30.0x 23.2x


At price target (A$13.00) FY18E FY19E FY20E

EV/EBITDA 34.4x 23.7x 18.2x


PER 50.3x 35.0x 27.1x



22 February 2018 9


a2 milk Company - A2M (Last price: A$11.30)

Interim Profit & Loss (NZ$) 1H17A 2H17A 1H18A 2H18E 1H19E 2H19E Annual Profit & Loss (NZ$) 2015A 2016A 2017A 2018E 2019E 2020E

30 June Year End 30 June Year End

Total revenue $m 256.1 293.4 434.7 530.9 632.7 707.6 Total revenue $m 155.1 352.8 549.5 965.6 1,340.3 1,630.5

Direct costs $m 137.0 148.7 218.2 266.4 312.1 345.2 Direct costs $m 100.4 201.5 285.7 484.6 657.3 773.2

Gross profit $m 119.1 144.7 216.6 264.5 320.6 362.4 Gross profit $m 54.7 151.3 263.8 481.0 683.0 857.4

Administrative expenses $m 13.7 18.7 21.8 23.1 26.2 26.4 Administrative expenses $m 15.4 27.0 32.4 44.8 52.6 61.9

Marketing expenses $m 16.0 26.0 26.0 61.6 66.1 81.0 Marketing expenses $m 10.3 33.0 42.0 87.6 147.2 180.1

Occpuancy expenses $m 0.8 0.7 1.0 1.2 1.5 1.7 Occpuancy expenses $m 0.5 0.8 1.5 2.2 3.2 4.3

Other expenses $m 26.1 23.2 25.8 26.3 28.8 30.7 Other expenses $m 27.3 38.5 49.3 52.1 59.5 68.1

Total overhead costs $m 56.6 68.6 74.6 112.2 122.6 139.9 Total overhead costs $m 53.5 99.3 125.2 186.8 262.5 314.4

EBIT $m 62.5 76.1 142.0 152.2 198.1 222.5 EBIT $m 1.3 52.0 138.6 294.2 420.6 542.9

Net finance costs $m -0.4 -0.4 -0.7 -2.4 -3.3 -3.9 Net finance costs $m 0.0 -0.3 -0.8 -3.2 -7.2 -10.0

Profit before tax $m 62.9 76.4 142.7 154.7 201.4 226.4 Profit before tax $m 1.3 52.3 139.4 297.4 427.8 552.9

Associates $m 0.0 0.0 0.0 0.0 0.0 0.0 Associates $m 0.0 0.0 0.0 0.0 0.0 0.0

Tax $m 23.5 25.2 44.3 48.0 62.4 70.2 Tax $m 3.4 21.9 48.7 92.2 132.7 171.5

Net profit after tax $m 39.4 51.3 98.5 106.7 138.9 156.2 Net profit after tax $m -2.1 30.4 90.6 205.2 295.1 381.5

Depreciation & Amortisation $m 1.6 1.1 1.1 1.6 1.6 1.6 Depreciation $m 1.9 2.7 2.7 2.7 3.2 3.2

EBITDA $m 64.2 77.1 143.1 153.9 199.7 224.1 EBITDA $m 3.2 54.7 141.2 296.9 423.8 546.2

Divisional breakdown 1H17A 2H17A 1H18A 2H18E 1H19E 2H19E Divisional breakdown 2015A 2016A 2017A 2018E 2019E 2020E

Revenue Revenue

Australia & NZ $m 206.6 233.0 304.3 342.4 416.7 418.7 Australia & NZ $m 149.1 296.3 439.6 646.7 835.5 921.3

China and other Asia $m 37.7 51.2 114.4 165.3 185.2 247.8 China and other Asia $m 4.0 38.2 88.9 279.7 433.0 603.6

UK and USA $m 11.8 9.3 16.1 23.1 30.8 41.1 UK and USA $m 1.9 18.3 21.1 39.2 71.9 105.6

Corporate and other $m - - - - - - Corporate and other $m - - - - - -

Total $m 256.0 293.6 434.7 530.9 632.7 707.6 Total $m 155.1 352.7 549.6 965.6 1,340.3 1,630.5

EBITDA EBITDA

Australia & NZ $m 70.4 84.9 116.4 130.2 160.6 161.5 Australia & NZ $m 30.0 84.7 155.3 246.5 322.1 354.6

China and other Asia $m 13.7 19.1 48.3 56.2 67.1 89.9 China and other Asia $m -3.1 9.2 32.8 104.5 157.0 234.3

UK and USA $m -7.7 -14.8 -8.4 -16.2 -9.2 -6.2 UK and USA $m -12.1 -20.5 -22.5 -24.6 -15.4 4.1

Corporate and other $m -12.3 -12.1 -13.4 -16.3 -18.8 -21.0 Corporate and other $m -11.7 -18.8 -24.4 -29.7 -39.8 -46.8

Total $m 64.1 77.1 143.0 153.9 199.7 224.1 Total $m 3.2 54.7 141.2 296.7 423.8 546.2

EBITDA margin EBITDA margin

Australia & NZ % 34.1% 36.4% 38.3% 38.0% 38.5% 38.6% Australia & NZ % 20.1% 28.6% 35.3% 38.1% 38.5% 38.5%

China and other Asia % 36.4% 37.3% 42.3% 34.0% 36.2% 36.3% China and other Asia % -76.7% 24.0% 36.9% 37.4% 36.3% 38.8%

UK and USA % -65.5% -158.5% -52.2% -70.0% -30.0% -15.0% UK and USA % -625.3% -112.2% -106.7% -62.8% -21.4% 3.9%

Corporate and other % - - - - - - Corporate and other % - - - - - -

Total % 25.0% 26.3% 32.9% 29.0% 31.6% 31.7% Total % 2.1% 15.5% 25.7% 30.7% 31.6% 33.5%

Discounted Cashflow Valuation FY17A FY18E FY19E FY20E Ratios & margins 2015A 2016A 2017A 2018E 2019E 2020E

PV of explicit cash flows $m 4,173 Gross margin % 35.3% 42.9% 48.0% 49.8% 51.0% 52.6%

PV of perpetuity $m 4,319 EBITDA margin % 2.1% 15.5% 25.7% 30.7% 31.6% 33.5%

PV FCFs available to owners $m 8,492 EBIT margin % 0.8% 14.7% 25.2% 30.5% 31.4% 33.3%

Less: net debt (adj $40m buy back) $m -121 NPAT margin % -1.3% 8.6% 16.5% 21.2% 22.0% 23.4%

SML stake $m 100

Equity value $m 8,713 Gross profit growth % 36.7% 176.5% 74.4% 82.4% 42.0% 25.5%

Valuation per share $/sh 11.81 EBITDA growth % -11.0% 1605.4% 157.9% 110.3% 42.7% 28.9%

NZDAUD x 0.94 EBIT growth % -26.1% nmf 166.5% 112.3% 42.9% 29.1%

A$ valuation per share $/sh 11.05 NPAT growth % nmf nmf 197.8% 126.4% 43.8% 29.2%

Implied P/E ratio x 96.1x 42.5x 29.5x 22.8x Earnings cps -0.3 4.3 12.3 27.8 40.0 51.7

Implied EV/EBIT x 61.3x 28.9x 20.2x 15.6x P/E ratio x - 272.6x 95.6x 42.2x 29.4x 22.7x

Implied EV/EBITDA x 60.2x 28.6x 20.0x 15.5x Dividend cps 0.0 0.0 0.0 0.0 20.0 28.4

Implied dividend yield x 0.0% 0.0% 1.7% 2.4% Payout ratio % 0.0% 0.0% 0.0% 0.0% 50.0% 55.0%

Dividend yield % 0.0% 0.0% 0.0% 0.0% 1.7% 2.4%

DCF assumptions Net debt $m -6.1 -69.4 -121.0 -285.8 -406.3 -550.1

Terminal year Year FY30 Asset beta . 0.9 Net debt/total assets % -6.9% -33.0% -35.2% -42.8% -46.7% -51.0%

Terminal China IF market share (est) % 8.6% Post-tax market risk premium % 7.0% Total debt/EBITDA x - - - - - -

Perpetuity growth rate % 2.0% Target D/V % 0.0% EV/EBITDA x - 157.0x 60.9x 29.0x 20.3x 15.7x

Risk free rate % 4.5% WACC % 9.1% EV/EBIT x - 165.3x 62.0x 29.2x 20.4x 15.8x

Cashflow Analysis 2015A 2016A 2017A 2018E 2019E 2020E Balance Sheet 2015A 2016A 2017A 2018E 2019E 2020E

EBITDA $m 3.2 54.7 141.3 296.9 423.8 546.2 Cash $m 6.1 69.4 121.0 285.8 406.3 550.1

- Net interest paid $m -0.1 -0.5 -0.9 -3.2 -7.2 -10.0 Receivables $m 39.9 45.4 72.9 96.6 127.3 154.9

- Taxes paid $m 2.5 9.7 31.2 94.5 132.7 171.5 Inventories $m 4.8 52.6 28.4 95.0 133.2 161.9

+ Other items $m 0.2 -3.3 7.9 5.1 0.0 0.0 PP&E $m 9.3 8.1 8.4 9.6 9.6 9.6

Gross cashflow $m 1.0 42.3 119.0 210.8 298.4 384.7 Investment in associates $m 0.0 0.0 0.0 0.0 0.0 0.0

- Increase in working capital $m 9.0 20.8 19.0 47.1 27.1 27.8 Intangibles & goodwill $m 17.2 16.3 13.3 13.9 13.9 13.9

Operating cash flow $m -8.1 21.5 99.9 163.7 271.3 356.9 Other assets $m 11.5 18.4 100.0 167.7 178.9 188.3

Total assets $m 88.9 210.2 343.9 668.6 869.2 1,078.8

- Acquisition of PP&E and intangibles $m 1.0 1.2 1.7 2.3 1.5 1.5

+ Proceeds from sale of PP&E and intangibles$m 0.0 0.0 0.0 0.0 0.0 0.0 Current payables $m 28.4 66.2 71.4 135.7 184.0 216.5

+ Other items $m -2.6 -0.9 -49.5 -1.5 -1.8 -1.8 Short term debt $m 0.0 0.0 0.0 0.0 0.0 0.0

Investing cash flow $m -3.6 -2.1 -51.1 -3.8 -3.2 -3.2 Long term debt $m 0.0 0.0 0.0 0.0 0.0 0.0

Other liabilities $m 1.9 10.9 31.1 34.5 34.5 34.5

+ Proceeds from issue of units $m 0.0 44.2 3.8 2.9 0.0 0.0 Total liabilties $m 30.2 77.1 102.4 170.2 218.6 251.0

- Distributions paid to shareholders $m 0.0 0.0 0.0 0.0 147.6 209.8

+ Other items $m 0.0 0.0 0.0 0.0 0.0 0.0 Issued capital $m 86.3 130.5 134.3 137.2 137.2 137.2

Financing cash flow $m 0.0 44.2 3.8 2.9 -147.6 -209.8 Reserves $m -27.7 2.5 107.2 361.2 513.4 690.5

Net change in cash $m -11.7 63.7 52.5 162.9 120.5 143.8 Total equity $m 58.6 133.1 241.5 498.4 650.6 827.8


22 February 2018 10

Macquarie Quant View

The quant model currently holds a strong positive view on a2 Milk Company.

The strongest style exposure is Price Momentum, indicating this stock has

had strong medium to long term returns which often persist into the future.

The weakest style exposure is Earnings Momentum, indicating this stock has

received earnings downgrades and is not well liked by sell side analysts.

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Australia & NZ) and Global

sector (Food Beverage &

Tobacco)

23/586 Global rank in

Food Beverage & Tobacco

% of BUY recommendations 62% (5/8)

Number of Price Target downgrades 0

Number of Price Target upgrades 3

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

-0.3

0.1

0.2

0.2

0.3

1.3

1.6

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

GrainCorp

Costa Group Holdings

Bega Cheese

Coca-Cola Amatil

Inghams Group

Treasury Wine Estates

a2 Milk Company

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

GrainCorp


Bega Cheese

Coca-Cola Amatil

Inghams Group


a2 Milk Company

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.4

1.4

1.1

-0.1

-1.2

0.7

0.8

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

GrainCorp


Bega Cheese

Coca-Cola Amatil

Inghams Group


a2 Milk Company

-100% -50% 0% 50% 100%

GrainCorp


Bega Cheese

Coca-Cola Amatil

Inghams Group


a2 Milk Company

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-46%

-43%

-31%

-11%

46%

55%

57%

68%

-75% -50% -25% 0% 25% 50% 75%

⇐ Negatives Positives ⇒

Operating Leverage NTM

Sales Growth FY1

Capex to Sales FY0

Sales to EV FY0

Price to Earnings LTM

Asset Growth

Price to Cash LTM

Interest Cover

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

0.04 0.03

-0.80-0.38

0.56 1.14

-0.24 0.99 0.10

-0.02 1.62

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/586)

0 50 100

Percentile relative

to market(/351)


22 February 2018 11

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2017

AU/NZ Asia RSA USA CA EUR

Outperform 51.82% 55.57% 44.05% 45.06% 60.00% 42.51% (for global coverage by Macquarie, 4.36% of stocks followed are investment banking clients)

Neutral 35.40% 28.60% 36.90% 47.59% 28.67% 40.42% (for global coverage by Macquarie, 2.58% of stocks followed are investment banking clients)

Underperform 12.77% 15.83% 19.05% 7.34% 11.33% 17.07% (for global coverage by Macquarie, 0.69% of stocks followed are investment banking clients)

A2M AU vs ASX 100, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, February 2018

12-month target price methodology

A2M AU: A$13.00 based on a PER methodology

Company-specific disclosures: A2M AU: Macquarie Group Limited together with its affiliates beneficially owns 1% or more of the equity securities of a2 Milk Company Ltd. Macquarie Group Limited together with its affiliates beneficially owns 1% or more of the equity securities of a2 Milk Company Ltd. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 21-Nov-2017 A2M AU Outperform A$8.29 17-Nov-2017 A2M AU Outperform A$7.56 19-Sep-2017 A2M AU Outperform A$5.81 24-Aug-2017 A2M AU Outperform A$5.39 25-Jul-2017 A2M AU Outperform A$4.58

Target price risk disclosures: A2M AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities


22 February 2018 12

Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group

This publication was disseminated on 21 February 2018 at 17:25 UTC.

The a2 Milk Company - Macquarie...The a2 Milk Company Flawless execution Event A2M reported its 1H18 result with EBITDA of $143m, 19% ahead of our , and NPAT of $99m (Macq $78m). Net

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