ATM-A2 MILK

[Ferg]

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.

Thanks Basil.  Why do I like buyback < NTA?  Because for a profitable company this is NTA accretive for remaining shareholders.  Paying say 95c to secure $1 is effectively arbitrage and as such the SP is undervalued when using NTA.  For me a SP < NTA is a potential indicator of good value, unless there are some structural issues with the business.

Whereas any buyback price > NTA for the same profitable company will be a PE multiple > 0 which is subject to opinions and interpretations as to whether or not that is good value.  As we know one man's junk is another man's treasure...

[winner (n)]

Undervalued when undertook share buyback they say ...probably had their own views and probably asked the likes of what's a good value and then took comfort from consensus brokers targets which at time ranged from $4.9o to $9.45 with average of $6.64 ....and prevailing price below 6 bucks

Whatever ......directors and management always say share price doesn't reflect true value blah blah 

[Basil]

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?

I think we'd all like to see that.
I get where you are coming from with the NTA angle on this and in the case of KFL, that 6% discount is about where we are at right now, but I digress.
My perspective is that to make a call on whether a company benefits by purchasing its own shares back at 30x forward earnings means making a call that there's very strong growth over the next 7-10 years.
Here's where I have a big problem with that.  ATM directors have clearly demonstrated they have very, very low forward visibility on earnings even within a single year of forecasting, hence how they got themselves into so much hot water with 2 class action lawsuits.  If they can't see one year ahead then quite obviously by extension, they can't see 7-10 years ahead so there's literally no basis whatsoever for paying 30 times forward earnings.
I believe it's an unhealthy thing for a board to retain all its earnings once its well established.  Its very easy for the directors to develop an unhealthy level of hubris that they know better than shareholders how to invest the cash that could otherwise have legitimately been paid out as dividends either with or without imputation credits.      I made good money from this on the way up and have been patiently waiting for many years for good value to reemerge.  I'm going to keep waiting while the confirmed downtrend keeps playing out.  The directors' actions with this buy-back do nothing to inspire me with confidence they know better than I do what shares are worth buying and when.

[BlackPeter]

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.

"Synlait does not own Platinum formula products or rights to it"

Well, I did not read the contracts and I presume never did you, but I remember that I talked some years ago at one of the Synlait company visits with Nigel Greenwood (who was at that stage still CFO for Synlait). He told me that Synlait holds the IP for A2 Platinum, and yes I was at that stage surprised how little real milk is in the can ;

So yes, some years ago, and things might have changed, but honestly - I would be surprised. if Synlait has given up their IP.

Just to be clear - I talk about the IP for the A2 Platinum Baby Formula (i.e x% fruitsugar, y% A2 milk powder, ...) .

Obviously - ATM holds some IP for methods to determine the A2 status for cow herds, but this is in this context quite irrelevant.

[Buzz]

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

Cheers

Hi Ferg, it was mainly during question time, a couple of moaners about the share price and the cash hoard. The outgoing Chair was more vocal than I've ever seen him, a bit testy even (hardly surprising as the quality of questions was pretty abysmal, imo). As usual it was more enlightening to chat with some of the Board after the formalities, although just a bit more colour rather than anything we hadn't already been told.

He correctly pointed out that no Board can dictate what the market share price is, and the Board is disappointed and thinks it's undervalued (with no insights given into how they calculate that, is there ever?). Some people conveniently forget ATM got slaughtered by Covid removing their main supply line into China, but that's fixed now. $1.59 billion revenue and improved on all financial metrics, Covid is behind us now, in a perverse way it was probably a good thing to expose the vulnerabilities of ATM.

The other point made about the cash hoard was the optionality that gives them for acquisitions, and the point was re-enforced a number of times and made in the same breath as being the only top 10 supplier who doesn't control the manufacturing process, and protecting the golden goose SAMR, albeit they already have 19% holding in Synlait. I think it's code for them going after Synlait, though in what form or when that might happen with Bright Diary in the mix, who knows.

As for 'exciting' growth, well I'd be happy with the forecast growth and revenue projections of $2b in 2026, assuming all other metrics improved in line with revenue. This is a growing company, very well established in its core China market, next to no debt, huge cash balance, growing market share even as the overall market is declining. Diversifying products and categories. Ironically increasing marketing spend (after the previous CEO was criticised for it), which is paying off. Expanding into USA and other Asia markets. Still solid market in Aus and NZ.

In that timeframe to 2026 the current combined ~$50m losses on USA and MVM should be reversed, so those retained earnings are probably being factored in to their financial projections, along with new revenues.

The mentions of the class action (there is only one, now combined) may take some time yet to play out and even if it went against ATM, they have insurance to cover some or all of the potential costs. It might not go against them either, I'd expect if ATM thought they were likely to lose, an out of court settlement would be negotiated, to avoid 'conviction' blame, and the insurers would certainly be in the room for that!

While I'm at it, frequent criticism of the Board and management may have failed to realise many of the Board and pretty much all of the ELT management have changed since Covid. The CEO has built up an impressive and very capable management team. The confidence in the room seems inspired.

Anyway, I like ATM and think at the current price it's worth having a modest % of a balanced portfolio. I am not looking in the rearview mirror with ATM, I don't care whether it ever gets back to the old share price, that's not the point imo.

[Breezy]

Just to add a note re the class action, there are still 2 in the mix, the NZ one is on a stay waiting the outcome of the Aussie one (There were 2 Aussie ones but now combined)

[Hectorplains]

The mentions of the class action (there is only one, now combined) may take some time yet to play out and even if it went against ATM, they have insurance to cover some or all of the potential costs. It might not go against them either, I'd expect if ATM thought they were likely to lose, an out of court settlement would be negotiated, to avoid 'conviction' blame, and the insurers would certainly be in the room for that!

I don't recall A2 announcing that they have insurance cover for the class action? The only clue I can see is that they don't appear to be paying legal expenses on the case.  Insurance covering the claim is not necessarily a given and I can't think of a class action here or in Australia where a company has come out and confirmed any level of cover prior to settlement.  So, the class action is not a zero risk, how much risk is baked into the current share price is anyone's guess. 

[CG]

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:
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??

NTA = NAV in case of KFL is absolutely correct. Because it's an investment company. In case of ATM it is not. There for comparison of NTA between these companies does not make any sense. Here is the quote from KFL website - "The NAV per share is calculated by taking the total number of shares held in a portfolio company, multiplied by the share price at market close. This calculation is completed for each company in the portfolio and added to the cash amount held to get the gross asset value (GAV) of the portfolio. Tax and other expenses are deducted from the GAV to provide the NAV. The NAV is divided by the number of shares on issue (excluding treasury stock) to provide the NAV per share."
So, effectively you are comparing market value of companies per share hold by KFL to net tangible assets per share hold by ATM. If you want compare NTAs you need calculate and sum NTAs of all companies hold by KFL per share. If you do that you might be surprised how low that value will be to compare to NAV value. Yes, we can discuss other things but also need to point out at something that doesn't make sense.

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?

That is not a fact but rather quite opposite. Share dilution is when a company issues additional stock and that decrease your ownership percentage. Buyback in any form on another hand will increase it. However, buyback above NTA will decrease NTA value per share but in any case increase earnings per share. That is a fact. Btw, can't say anything about SBLK but DGL (ASX I presume) so far made buyback transactions about 15% above NTA not below.

I don't think you will see or find any calculations showing the buyback for ATM was undervalued on the basis the SP. After all they were buying on an open market. Everyone is using there own methodology and expectations. I don't know why ATM management thought it was undervalued. Need ask them. I think it was about right at time of share buyback and I think it should be about the same value now. Also I think it was overpriced at $20. But this is how market works.

[CG]

"Synlait does not own Platinum formula products or rights to it"

Well, I did not read the contracts and I presume never did you, but I remember that I talked some years ago at one of the Synlait company visits with Nigel Greenwood (who was at that stage still CFO for Synlait). He told me that Synlait holds the IP for A2 Platinum, and yes I was at that stage surprised how little real milk is in the can ;

So yes, some years ago, and things might have changed, but honestly - I would be surprised. if Synlait has given up their IP.

Just to be clear - I talk about the IP for the A2 Platinum Baby Formula (i.e x% fruitsugar, y% A2 milk powder, ...) .

Obviously - ATM holds some IP for methods to determine the A2 status for cow herds, but this is in this context quite irrelevant.

From ATM website - "The a2 Milk Company Limited owns and commercializes a suite of intellectual property relating to the marketing and production of a2™ branded products. Contact The a2 Milk Company Limited (info@a2milk.com) for more information about the intellectual property associated with a2™ branded products."

Last time I checked a2 Platinum trademark belongs to ATM. I'm sure ATM can manufacture a2 Platinum anywhere they what outside Synlait facilities. But I doubt Synlait allowed to sell a single can of it anywhere in the world.

[Hectorplains]

From ATM website - "The a2 Milk Company Limited owns and commercializes a suite of intellectual property relating to the marketing and production of a2™ branded products. Contact The a2 Milk Company Limited (info@a2milk.com) for more information about the intellectual property associated with a2™ branded products."

Last time I checked a2 Platinum trademark belongs to ATM. I'm sure ATM can manufacture a2 Platinum anywhere they what outside Synlait facilities. But I doubt Synlait allowed to sell a single can of it anywhere in the world.

Synlait and A2 are bickering at present as to exclusivity of A2's IMF production.  That agreement precluded A2 producing their formula elsewhere.  Until that is sorted A2 can't manufacture where or with whom they like. 

As SML holds the Chinese regulatory State Administration for Market Regulation (SAMR) licence which is attached to Synlait's Dunsandel manufacturing facilities. The licence is for The a2 Milk Company's Chinese labelled 至初® Infant Formula (stages one, two and three), SML will continue to manufacture those products for A2 at least for the length of that licence (currently expiring September 2027).

[BlackPeter]

From ATM website - "The a2 Milk Company Limited owns and commercializes a suite of intellectual property relating to the marketing and production of a2™ branded products. Contact The a2 Milk Company Limited (info@a2milk.com) for more information about the intellectual property associated with a2™ branded products."

Last time I checked a2 Platinum trademark belongs to ATM. I'm sure ATM can manufacture a2 Platinum anywhere they what outside Synlait facilities. But I doubt Synlait allowed to sell a single can of it anywhere in the world.

Quite beside the point. Of course will the A2 Platinum trademark belong to ATM. The question is - who holds the IP for the recipe?

Still in 2018 this was Synlait. Do you have any evidence that this changed since then?

https://www.farmersweekly.co.nz/news/fonterra-a2-deal-okay-by-synlait/

Look, if things would be as easy as you suggest, than I am wondering, why these mediation talks between Synlait and ATM are so hard that they had to go into arbitration.

I suppose parts of the IP (like e.g. the brand, as you suggested) belongs to ATM and part of the IP (like the recipe) belong to Synlait. The whole thing will be muddied by additional agreements between the both companies (like the exclusive supply agreement), which didn't matter too much, as long as the relationship between them was good. Now the gloves are off.

https://businessdesk.co.nz/article/primary-sector/a2-milk-and-synlait-head-to-arbitration-after-good-faith-talks-hit-stalemate (paywalled)

Always a bit scary for shareholders if your company stands before court proceedings where only one clear winner will emerge: The lawyers!

But I guess lets first see how this arbitration ends. Quite interesting and relaxing to watch this stuff from the sidelines.

[Basil]

Just to add a note re the class action, there are still 2 in the mix, the NZ one is on a stay waiting the outcome of the Aussie one (There were 2 Aussie ones but now combined)

I presume you have joined in with the N.Z. one awaiting the outcome of the Australian case.  I followed what they said that year closely and I think there's a prima facie case to answer.  Best wishes with it for a successful outcome.  You and other shareholders deserved better from ATM than the forecasting fiasco you got that year.

[Breezy]

I presume you have joined in with the N.Z. one awaiting the outcome of the Australian case.  I followed what they said that year closely and I think there's a prima facie case to answer.  Best wishes with it for a successful outcome.  You and other shareholders deserved better from ATM than the forecasting fiasco you got that year.

Thanks and all shareholders are included in the Aussie one at this point until a further court date at which point you can opt out, im in both at the moment but will most likely opt out of the Aussie one as double commissions would be payable and the NZ one has lower commissions. I'm not expecting anything out of it but would be very grateful if something come along although my situation is rather more complex due to the very large number of transactions during that period.

[CG]

Synlait and A2 are bickering at present as to exclusivity of A2's IMF production.  That agreement precluded A2 producing their formula elsewhere.  Until that is sorted A2 can't manufacture where or with whom they like. 

As SML holds the Chinese regulatory State Administration for Market Regulation (SAMR) licence which is attached to Synlait's Dunsandel manufacturing facilities. The licence is for The a2 Milk Company's Chinese labelled 至初® Infant Formula (stages one, two and three), SML will continue to manufacture those products for A2 at least for the length of that licence (currently expiring September 2027).

Dear Hectorplains and others, please read carefully the following statement below from ATM, especially the bit that is in bold. Synlait has exclusive rights for manufacturing and supply for sale in China and ANZ. And I do not dispute that. For the rest of the world ATM can manufacture its products wherever it wish. Plus, my post wasn't about exclusivity rights to manufacture it was about who owned rights to a2 branded products. And SAMR license  doesn't play any role in this

"The a2 Milk Company Limited (a2MC, the Company) advises that after market hours on Friday, 15 September it provided Synlait Milk Limited (Synlait) with written notice cancelling the exclusive manufacturing and supply rights enjoyed by Synlait in respect of stages 1 to 3 of a2MC's current infant milk formula (IMF) products (being a2 Platinum® and a2 至初®) for sale by a2MC in the markets of China, Australia and New Zealand. Stage 4 IMF and other a2MC products supplied by Synlait are not subject to exclusivity. Synlait has advised that it is considering the notice of cancellation, it reserves its rights, and it will respond formally in due course."

[CG]

Quite beside the point. Of course will the A2 Platinum trademark belong to ATM. The question is - who holds the IP for the recipe?

Still in 2018 this was Synlait. Do you have any evidence that this changed since then?

https://www.farmersweekly.co.nz/news/fonterra-a2-deal-okay-by-synlait/

Look, if things would be as easy as you suggest, than I am wondering, why these mediation talks between Synlait and ATM are so hard that they had to go into arbitration.

I suppose parts of the IP (like e.g. the brand, as you suggested) belongs to ATM and part of the IP (like the recipe) belong to Synlait. The whole thing will be muddied by additional agreements between the both companies (like the exclusive supply agreement), which didn't matter too much, as long as the relationship between them was good. Now the gloves are off.

https://businessdesk.co.nz/article/primary-sector/a2-milk-and-synlait-head-to-arbitration-after-good-faith-talks-hit-stalemate (paywalled)

Always a bit scary for shareholders if your company stands before court proceedings where only one clear winner will emerge: The lawyers!

But I guess lets first see how this arbitration ends. Quite interesting and relaxing to watch this stuff from the sidelines.

"a2 Milk Company Limited owns ... intellectual property to ... production of a2™ branded products" is beside the point? You claim that Synlait holds IP for a2 Platinum production and I showed you that it's ATM own it. Where in the article you provided it says that Synlait holds IPs to a2 Platinum or own the recipes? I couldn't find. The only thing I found is before they engaged with Synlait they were solely an IP, brands and marketing business.
Exclusivity rights dispute has absolutely nothing to do with IP rights.