ATM-A2 MILK

[Breezy]

You just forget that ATM was always priced as "growth company" with unlimited scalability (due to its previous marketing only strategy). They changed their strategy, given that growth did not work. Today it is just another boring and not scalable milk processor (more milk, more stainless steel) with a forward PE of 16 (at the current low SP). A fair PE for a not growing agricultural company might be around 10, So - a share price of $2.40 would still not sound cheap, but o.k. Everything above that is hype.

To get back to $8 you would either need a lot of credible growth (and I don't see, where this is supposed to come from with China shrinking) ... or a ton of hype.

And yes, I heard for the better part of a decade how much worth ATM is due to its cash reserves. Did you ever do the numbers how much cash per share they really hold? At last FY it was roughly 60 cents per share, and clearly - the board hasn't demonstrated yet that they know what to do with money (other than wasting it). So, if you like add that to the PE based SP as dead capital, but really - what are 60 cents cash per share worth if the board does not know how to make money with it? So far they only demonstrated that they know how to pump hype and they know how to waste money.

Good luck with your investment, I think you will need it.

As an aside its actually over $1/share now and I think luck is a key factor in any stock market investment and I don't think any random participant on an anonymous share forum speaks with any absolute authority, just opinions and guesswork.

[BlackPeter]

As an aside its actually over $1/share now and I think luck is a key factor in any stock market investment and I don't think any random participant on an anonymous share forum speaks with any absolute authority, just opinions and guesswork.

"As an aside its actually over $1/share now"

Is it? You want to show us your numbers?

FY2023 (page 87 of the annual report) lists $352m in cash and short term deposits. Shares outstanding are 723m (both numbers rounded to the third digit).

My old trustworthy table calculator tells me that this would be  only 49 cents (well, 48.68 cents) per share. The number I used (60 cents) are based on FY 2022 (blame me for not updating my spreadsheet in real time) - i.e. it appears ATM's cash reserves actually got worse instead of better.

I would not like the trend, but hey - each to their own ;

[Ferg]

As an aside its actually over $1/share now and I think luck is a key factor in any stock market investment and I don't think any random participant on an anonymous share forum speaks with any absolute authority, just opinions and guesswork.

Agreed you cannot trust randoms on the internet.....they should provide a source for their numbers.  I presume this was your calc using the last AR?

Edit: image 1 has weighted average shares, image 2 has year end shares on issue.

[Ferg]

Page 88 of the 2023 AR.

[Ferg]

That is a weird interpretation of "cash reserves" to exclude cash on deposit for > 3 months.

[Basil]

You just forget that ATM was always priced as "growth company" with unlimited scalability...snip
Good luck with your investment, I think you will need it.

https://www.marketscreener.com/quote/stock/THE-A2-MILK-COMPANY-LIMIT-11384022/finances/
Yes, I tend to agree with almost all that.  Currently trading on 19.3 times consensus forward eps of 22 cps.
What I find quite extraordinary is that the consensus price target is $5.99 which would place it on 27.2 times forward earnings, similar metrics to when it was growing strongly under Geoffrey Babbage's excellent leadership. Not sure what the average analyst is seeing or smoking that I'm not, but I'm not going to lose any sleep over it. For mine, I don't think there is any doubt it is growing at a much, much slower pace these days and deserves metrics commensurate with that new reality.

I am also extremely wary of being a shareholder of any company that's been around for quite a long time that thinks they have a "first mortgage" on all the very best idea's for using my shareholder cash and refuse to ever distribute any of it by way of dividend.  I think it's clear to many that when the buy-back was going on it materially affected the share price northward, and they paid far too much in the end.  Reckless wastefulness of shareholder funds that should have been paid out as a dividend in my opinion.

Genuine question.  Whatever happened to the two shareholder class action lawsuits a while back ?  Still gradually working their way through the legal system ?  I still hold the view that you should take ATM's forward guidance with a grain of salt.

[Breezy]

Agreed you cannot trust randoms on the internet.....they should provide a source for their numbers.  I presume this was your calc using the last AR?

Edit: image 1 has weighted average shares, image 2 has year end shares on issue.

Yep that's the one, over double the 49c quoted by BP,  perhaps a new calculator is in order.

[Buzz]

While it's still fashionable to bag ATM, and it's been an enduring fashion for very valid reasons for quite a long time, I think you'll find that none of the detractors have followed the company or are up to date with the market situation, financial position, ambitions, risks, or anything significant about the company for that matter.

Understandably so imo, why would anyone waste time investigating something that they've convinced themselves is a basket case and not worth a cent of their investment money. Perfectly sensible.

[Ferg]

I am also extremely wary of being a shareholder of any company that's been around for quite a long time that thinks they have a "first mortgage" on all the very best idea's for using my shareholder cash and refuse to ever distribute any of it by way of dividend.  I think it's clear to many that when the buy-back was going on it materially affected the share price northward, and they paid far too much in the end.  Reckless wastefulness of shareholder funds that should have been paid out as a dividend in my opinion.

Agree 100%.  The buyback was terrible.....right up there in terms of worst buybacks ever.

Regarding/exploring dividends:
Per the last AR they had $49m of imputation credits, which would support imputed gross dividends of $175m.  Assuming they pay out 90% of cashflow after deducting capex, lease & loan payments that would leave a nett payment of circa ( $111 x 1.01 - $10 - $4 - $15m estimate = $83m  x 90% = ) $75m nett -> $104m gross.  This would be a dividend of 14.5c per share assuming 1% operating CF growth, no buybacks or changes to issued shares & $15m loan repayments p.a.

Given NZ imputation credits did not grow in 2023, and assuming they do not in future, then imputed dividends could be maintained for less than 2 years.  They would need to start doing some profit transferring back to NZ to not only get more imputation credits, but to also take advantage of the 2% lower tax rate versus Oz.  Many overseas companies have their head office in Ireland for good reason....surely more NZ companies could legitimately take advantage of our lower tax rate vs Oz, as HLG are currently doing.  NZ is where the IP was developed.

Using a risk free rate of 8% and assuming a growth rate of 1% p.a., the dividend valuation model suggests an annual dividend of 14.5c would value the share around $2.  Ouch.  At the risk of stating the obvious, growth in EPS, FCF and IC's are needed for a) SP support and b) the theoretical value per the DVM to be anywhere near the current SP.

[Buzz]

Agree 100%.  The buyback was terrible.....right up there in terms of worst buybacks ever.

Regarding/exploring dividends:
Per the last AR they had $49m of imputation credits, which would support imputed gross dividends of $175m.  Assuming they pay out 90% of cashflow after deducting capex, lease & loan payments that would leave a nett payment of circa ( $111 x 1.01 - $10 - $4 - $15m estimate = $83m  x 90% = ) $75m nett -> $104m gross.  This would be a dividend of 14.5c per share assuming 1% operating CF growth, no buybacks or changes to issued shares & $15m loan repayments p.a.

Given NZ imputation credits did not grow in 2023, and assuming they do not in future, then imputed dividends could be maintained for less than 2 years.  They would need to start doing some profit transferring back to NZ to not only get more imputation credits, but to also take advantage of the 2% lower tax rate versus Oz.  Many overseas companies have their head office in Ireland for good reason....surely more NZ companies could legitimately take advantage of our lower tax rate vs Oz, as HLG are currently doing.  NZ is where the IP was developed.

Using a risk free rate of 8% and assuming a growth rate of 1% p.a., the dividend valuation model suggests an annual dividend of 14.5c would value the share around $2.  Ouch.  At the risk of stating the obvious, growth in EPS, FCF and IC's are needed for a) SP support and b) the theoretical value per the DVM to be anywhere near the current SP.

Hey Ferg, lots of people seem to bag the company for not paying out the cash  in bank to shareholders, or some other creative mechanism to return it to shareholders, but have you considered the ambition to own their supply chain and especially the SAMR?

It will cost a lot of money, fortunately they have a lot of money in the bank and next to no debt, and they might not need to reach out to shareholders to fund their ambition.

Some very poignant comments at the AGM from the departing Chair (a few 'shot across the bows comments', far more than years previous, are you aware of them? The company is changing tack, it's moving to control its end-to-end supply chain. That's not surprising considering their majority shareholders vested interests. (China)

Bagging ATM for a buyback that in TOTO turned out to be well above the prevailing market price, since and now, is like saying their crystal ball is broken. No company has a crystal ball on the market, no company can predict whether returning capital to shareholders is right-timed.

It seemed ok at the time, just didn't work out so well according to the market, but we shareholders do own a bit more of the company, even if we effectively paid a premium according to the market pricing now.

The thing I would like to see is that those who choose to comment on ATM are fully informed, up to date with financials, market, ambition, risks, etc. We cannot have a reasoned debate on the investment worth or otherwise while most of us are dwelling on the past, or a perception of the present.

[Ferg]

Thanks for your comments Buzz.

For context I usually read/listen to the CEO and Chairmans report as well as pick the eyes out of the crucial pieces.  I'm a big fan of using, and often work according to, your signature.  I get what A2 is about.  I read a lot of what is posted here and elsewhere and I certainly do not think they are 'just another boring milk company'.  I understand the health benefits of non-A1 milk for certain people and populations, and I can see the growth opportunities.  So whilst I consider myself somewhat informed, I would not consider myself "fully informed" given time commitments elsewhere and the number of investments I follow prevent me from spending much more time doing deep dives on ATM (or others).  So whilst I try to keep up, I'm happy to have any gaps filled in.  I did not see the Chairman speak so I did not see the 'shots across the bow'; I didn't pick up any such flavour from the reports.  Care to share more on that?

Buyback: I'm on record earlier for questioning the price they paid for the buyback relative to NTA.  I wasn't questioning the timing of the price paid or their crystal ball - rather I questioned why they thought it was undervalued, especially when the SP of the day exceeded NTA.  I said:

...my understanding is that these should be done when a stock is undervalued.  On what basis do they think it is undervalued?  I would like to see their workings and logic.  Given the buyback price exceeds NTA then this is NTA dilutive to remaining shareholders which is not good....although given the number of shares on issue, any such adjustments may be minimal.

I know it is a lot to expect a company to release their undervaluation calculations, although I note that KFL consider this to be when the SP is at a discount of 6% or more to their NTA.  Yes I also said it was terrible - that was a) relative to NTA and b) with the benefit of hindsight relative to the SP.

For the dividends there was no criticism - merely some analysis to show meaningful imputed dividends were not possible and/or practical.  The only judgement was that the level of dividend possible, assuming it could be maintained given the inputs of today, was insufficient to support the current SP in the current low growth environment.  ATM signalled low single digit growth next FY - I worked with the lowest single digit.  Certainly everyone wants more than that; IMO the USA and non-A1 angles are the keys to higher growth but China is crucial as the base of earnings.  Growing share in a declining market is impressive, but that is not a good place to be.

Regarding investing in the future and owning the supply chain, I am all for that and you would have seen me post such comments elsewhere.  However, I get the sense with ATM it is lots of wind and little delivery.  They have been sitting on oodles of cash for quite a while.

In particular they talk about growth opportunities, M&A and prudent capital management etc; meanwhile they have been sitting on in excess of $800m 'cash reserves' since the 2020 year end.  During which time they had positive operating cash flows for the last 4 years of $289m, $427m $203m & $111m.  During this time $184m was invested into Synlait and $213 for MVM.  Actions speak louder than words so you can forgive me for being somewhat sceptical.  Their level of M&A activity and speed of delivery is glacial.  I believe they have come through the Covid/Daigou fiasco a better company, but my fear is the pace of change executed versus what is needed feels sloth-like and/or extremely conservative.  {Edit: I never thought I would see the day where I called a marketing oriented company 'extremely conservative' - but there it is!}

Please tell me about these 'shots across the bow' and where you see exciting growth opportunities for ATM.

Cheers

Hey Ferg, lots of people seem to bag the company for not paying out the cash  in bank to shareholders, or some other creative mechanism to return it to shareholders, but have you considered the ambition to own their supply chain and especially the SAMR?

It will cost a lot of money, fortunately they have a lot of money in the bank and next to no debt, and they might not need to reach out to shareholders to fund their ambition.

Some very poignant comments at the AGM from the departing Chair (a few 'shot across the bows comments', far more than years previous, are you aware of them? The company is changing tack, it's moving to control its end-to-end supply chain. That's not surprising considering their majority shareholders vested interests. (China)

Bagging ATM for a buyback that in TOTO turned out to be well above the prevailing market price, since and now, is like saying their crystal ball is broken. No company has a crystal ball on the market, no company can predict whether returning capital to shareholders is right-timed.

It seemed ok at the time, just didn't work out so well according to the market, but we shareholders do own a bit more of the company, even if we effectively paid a premium according to the market pricing now.

The thing I would like to see is that those who choose to comment on ATM are fully informed, up to date with financials, market, ambition, risks, etc. We cannot have a reasoned debate on the investment worth or otherwise while most of us are dwelling on the past, or a perception of the present.

[winner (n)]

I'm reasonably informed on A2 and note their ambition to grow revenues to $2 billion and ebitda margin to be in the teens but improving year on year

So F26 will see $2billion sales and ebitda at say 17% which is $340m ...up from $220m in F23. That's pretty good growth eh.

That forecast a bit more bullish than guru analyst forecasts (msrketscreener) but whatever they should be producing an eps of 33/35 cents

And then one need to add on what they generate from any acquisitions

So with current share price close to multi year lows one can see why some punters are getting excited about the future and cashing in big time as the A2 strategy unfolds.

[CG]

Buyback: I'm on record earlier for questioning the price they paid for the buyback relative to NTA.  I wasn't questioning the timing of the price paid or their crystal ball - rather I questioned why they thought it was undervalued, especially when the SP of the day exceeded NTA.  I said:I know it is a lot to expect a company to release their undervaluation calculations, although I note that KFL consider this to be when the SP is at a discount of 6% or more to their NTA.  Yes I also said it was terrible - that was a) relative to NTA and b) with the benefit of hindsight relative to the SP.

It seems like you have some valid points. For example capital management could be a bit more transparent. However, I'm somewhat puzzled by your criticism of the buyback. Yes, it always could be better. But why are you tying buyback to NTA? ATM is not a REIT. Pretty much any company except REITs and few others have SP higher then NTA. Sparks NTA currently $0.61 and they are on a middle of buyback at the moment. CNU did it recently with their NTA $1.60. KFL does not consider buyback when the SP is at discount of 6% or more to their NTA. It's 6% or more to NAV. You do know the difference, right?
The timing or rather management of buyback also could be better, but at the time it looked reasonable. They announced it when SP was around lowest level in 2 years. It's not a surprise that SP went up during buyback and fall down after. Happens to many buybacks. FBU conducted buyback last year with average price $6.63 and where the SP now? So, I would not say ATM's share buyback was the worst ever. Not well managed - yes, worst - no.

And again, why some call ATM marketing company? Just because they use third party production facilities does not make them marketing company. Despite what some people here say, they own their products and intellectual property. Synlait does not own Platinum formula products or rights to it. It just holds license to manufacture for certain region. Apple does not manufacture iphones, Foxconn does. It does not make Apple a marketing company. Majority of companies in all industries around the world using third party manufacturers for their products. But it does not make all of them marketing companies.

[Basil]

I think you are right to question the validity of referring to the buyback relative to the NTA.
What really matters is the price they executed at relative to forward earnings and they paid a whopping 30 times forward earnings at the time.  This is exactly the metrics the company was priced at when it was growing very strongly under Geoffrey Babbage's excellent leadership and is entirely inappropriate now the company is growing at a much lower rate....but what would I know, I've been saying this is overpriced since it was $21 years ago.

[Ferg]

KFL does not consider buyback when the SP is at discount of 6% or more to their NTA. It's 6% or more to NAV. You do know the difference, right?

Fair cop.  NTA was loose phraseology on my part if we want to be precise about it, given KFL mention NAV.  I kept with NTA given I knew the value was the same as NAV and I did not want to complicate the conversation.  KFL has no intangible assets therefore NTA = NAV in this case for KFL.

Per their last annual report:

NET ASSET VALUE The net asset value of Kingfish as at 31 March 2023 was $1.40 per share (2022: $1.58) calculated as the net assets of $461,584,438 divided by the number of share

You likely have a differing interpretation of a marketing company and I acknowledge ATM is transitioning to manufacturing...but surely we have better things to discuss than NAV <> NTA when the values are the same, and what is a marketing company??

I will reiterate what I said earlier: any buyback in excess of NTA is NTA dilutive to shareholders.  Fact.

Whether or not a buyback > NTA is an issue depends on ones personal perspective.  I genuinely don't care about other companies buying back > NTA where I don't hold any shares - they can knock themselves out.  I do like SBLK and DGL buybacks which are under NTA and I'm a holder.  My personal opinion on ATM is that I don't like a buyback > NTA given I am a holder.

I'm still curious to see the calculations showing the buyback for ATM was on the basis the SP of the day was undervalued.....wouldn't you?