ATM-A2 MILK

[Ferg]

CG: let's take the NTA/NAV conversation offline - you are not quoting me correctly and you are effectively arguing against yourself.  Show me where I said buybacks were share dilutive, or where I said we should compare NTA of ATM to NTA of KFL.  I didn't.  You state buybacks > NTA reduce NTA for remaining shareholders which is what I said (quote: "NTA dilutive").  Any further discussion will pollute this thread to no-one's benefit plus it is now off topic.  I have sent you a PM.

[Ferg]

An interesting video where Madison Reidy from Markets with Madison interviews ATM CEO David Bortolussi.  Winner posted this over at ShareTrader:

[Hectorplains]

Scott Waddell, the Project Manager for MVM, has been nominated as a finalist for the Change Maker Award at the NZ Sustainable Business Network Awards for 2023.  The Change Maker Award celebrates a young person who is driving sustainability change within their organisation or the wider community.  Waddell has driven the change of a not particularly old and perfectly functional boiler over to a new electric one.  Dimmer beings, like myself,  might dismiss this as a waste of time and resources.  This 'sustainability' change won't decrease production costs or drive any greater production efficiency.  Still I'm sure shareholders will be stoked that with a multitude of problems at MVM (like an EBITDA loss of $26.5 million in Y23) they've got a guy whose solved one that didn't even exist.  Magnificent, surely he's a shoe in for the win then? 

Yay, as predicted Waddell won the Change Maker Award yesterday.  That probably explains why he's too busy to reply to emails.  Still no announcement as to when this white elephant, sorry boiler, comes into commercial use. 

[Left Field]

Ferg and Winner thanks for bringing the video to our attention. A lot of useful info in it.

Alluded to in the Video was A2m's huge marketing spend in China that has not only won them significant market share gains over the last year, but also now this award...... up there with the big boys Coca Cola and Harley Davidson no less!

Best expression of a brand on social media channels

Gold – The Coca-Cola Company

Silver – The a2 Milk Company Limited and Ylab

Bronze – HSBC Life (Singapore) and PHD Media

Highly commended – Harley-Davidson and MADJOR

Highly commended – Newell Papermate Pens and SGK Inc

https://www.transformmagazine.net/articles/2023/winners-announced-for-transform-awards-asia-2023/

I guess if you spend $260 Mill in advertising you better get something to show for it!

[Left Field]

Seems Forsyth Barr bullish on ATM

OUTPERFORM

The a2 Milk Company (ATM) is changing its stripes. It has well-publicised strategic intentions to vertically integrate its supply chain, be it through M&A, organic investment at Mataura Valley Milk (MVM), or JVs/alliances. It's not a matter of if, it's a matter of when. Our detailed scenario analysis assesses how ATM would evolve should it purchase SynlaitMilk's (SML) Dunsandel asset. We acknowledge this isn't necessarily likely but we think it would prove to be an attractive asset for ATM, helping to reduce supply chain risks (mainly regulatory), capture manufacturing margin (albeit we don't think group margins will notably improve), and drive EPS growth ahead of current consensus forecasts. We have also explored the ramifications should ATM pursue other NZ manufacturing sites. Given current undemanding valuation multiples, investors appear cautious on the potential implications of such a large investment. Our analysis supports our OUTPERFORM rating, and we believe the market is too cautious on the potential capex investment implications.


ATM will vertically integrate its supply chain in time — there are numerous options


One of ATM's five strategic pillars is to 'transform its supply chain' with the desire to: (1) expand China Label (CL) registered market access, (2) utilise MVM and invest in NZ capability, and (3) develop China supply capability. As part of all five pillars, it has stated it will, 'explore opportunities to accelerate strategy execution through M&A, JVs, and alliances'. The key quantitative targets related to its supply chain are access to at least three CL registrations and an expanded English Label (EL) IF portfolio. The key attraction is wider access to CL licenses; this makes sense to us as the company seeks to improve its competitive positioning over the long term, and reduce future regulatory supply chain risks. ATM has numerous viable options, including: (1) SML Dunsandel, (2) Bodco's blending & canning site, (3) other NZ based IF manufacturers (notably Yili or Yashili), (4) expedite MVM investment, and/or (5) invest in China.
A compelling option is to acquire SML's Dunsandel asset. We are not suggesting this is likely, but it does offer attractive qualities to ATM, particularly the all important regulatory licenses. We don't have a firm view on value but would expect a purchase price >NZ$400m. Our base case scenario suggests FY25 EPS accretion of ~+35% to +40% (fully cash funded), ROIC decline to ~16% (from ~17% in FY23), and a reduction in net cash balance to ~NZ$415m (from ~NZ$720m at FY23).

Valuation is relatively attractive; the market appears overly nervous on the capex implications


We have previously argued ATM's earnings multiple has been too high, particularly given the fundamental change in growth and returns as it morphs into a conventional consumer staples company. ATM is now trading on a 12 month forward PE of ~17x (~14x cash adjusted) and EV/EBIT of ~10x, ~-40% below its respective five year average multiples. It is now trading in-line with similar consumer staples peers on a PE basis and ~-20% EV/EBIT discount (both at record lows on a relative basis). We are now comfortable: (1) the step-change in ATM's business is being appropriately reflected in its share price, and (2) see relative valuation as attractive, particularly given our constructive view on medium-term growth (FY26 to FY23 EPS CAGR of ~+10%).


Currently ATM only 2% of my portfolio (thanks to profits taken) however, I fondly remember the days when it was 70%!!
Will continue watching and waiting for another confirmed uptrend.......... we need to see signs of good progress of diversification in the USA market IMO.

[Minimoke]

I rate Forr Bar as next to useless when it comes to any kind of analysis. They have had too many significant fails for me to value their opinions.

I disagree that A2m is unlikely to purchase Dunsandel.

Firstly I see Synlait as being a significantly distressed company. With limited options to repay pay bankers and virtually no options to repay bond holders. Synlait need to sell dairy works to repay bankers. They need to sell dunsandel to repay bondholders.

Given Dunsandel  is more than likely going to end up fro sale. Who could buy? A2M have an ever increasing war chest of cash that they simply seem to consistently refuse to apply to any overseas  opportunities. For years they have said "We can put our cash to better use than shareholders - via a dividend" but have failed to buy anything other than Matuara. So surely they must have been keeping their tinder dry until Dunsandel became as cheap as chips. Which it is now.

Bright Dairy I suspect will stand aside. Its not about bright dairy (or state farms) - its about centralised chinese government feeding its population and keeping their elites happy.

And then there are synergies that can be brought into play with Mataura. Have one NZ head of Manufacturing looking after both Dunsandel and Mataura. One, integrated computer system, one set of farm producer standards. Bring in cost efficiencies and create more competition for Fonterra but not west gold milk.

[Ferg]

we need to see signs of good progress of diversification in the USA market IMO.

100% agree.  We have seen what happens when all the eggs are in one basket.  Whilst shoring up China would be great, IMO USA should be the key to growth.

[Mr Slothbear]

I rate Forr Bar as next to useless when it comes to any kind of analysis. They have had too many significant fails for me to value their opinions.

I disagree that A2m is unlikely to purchase Dunsandel.

Firstly I see Synlait as being a significantly distressed company. With limited options to repay pay bankers and virtually no options to repay bond holders. Synlait need to sell dairy works to repay bankers. They need to sell dunsandel to repay bondholders.

Given Dunsandel  is more than likely going to end up fro sale. Who could buy? A2M have an ever increasing war chest of cash that they simply seem to consistently refuse to apply to any overseas  opportunities. For years they have said "We can put our cash to better use than shareholders - via a dividend" but have failed to buy anything other than Matuara. So surely they must have been keeping their tinder dry until Dunsandel became as cheap as chips. Which it is now.

Bright Dairy I suspect will stand aside. Its not about bright dairy (or state farms) - its about centralised chinese government feeding its population and keeping their elites happy.

And then there are synergies that can be brought into play with Mataura. Have one NZ head of Manufacturing looking after both Dunsandel and Mataura. One, integrated computer system, one set of farm producer standards. Bring in cost efficiencies and create more competition for Fonterra but not west gold milk.

Excellent post and I completely agree.

What do you mean in that last sentence about west gold milk? Why would it not effect them?

[Minimoke]

Excellent post and I completely agree.

What do you mean in that last sentence about west gold milk? Why would it not effect them?

Westland Milk. (When you drive through the coast you see  signs saying "entering gold milk country."

We shouldn't forget Westland Milk were near collapse in 2019. Government was even considering a tax payer bailout because they couldn't afford to see a major industry on the West Coast go under.  West land had debt of $342m - approx 60% of the company value. Rune that measure against Synlait!

But the Chineses (Yili) stepped in and offered way over the odds. Initial valuations put Westland at $0.88 - $1.38 a share. Yili paid $3.41 ma share of $588m.

So They Chinese have no qualms about paying over the odds to secure NZ food supply. But they won't want to compete against Yili. By allowing Bright / State Farms (via A2M to give it the semblance of retained local ownership) China then only has Fonterra to compete with.

[Left Field]

ATM on the leader board today......up 3.9% or 17c.....seems the decline in the latest Chinese birth rate decline figures are not as large as ATM were predicting...... plus news that A2 is now being marketed via Amazon in USA.

[Buzz]

ATM on the leader board today......up 3.9% or 17c.....seems the decline in the latest Chinese birth rate decline figures are not as large as ATM were predicting...... plus news that A2 is now being marketed via Amazon in USA.

Up over 5% on ASX. The Amazon news is huge for breaking into the USA market

[Minimoke]

45 results when searching for A2 on Amazon

[BlackPeter]

Up over 5% on ASX. The Amazon news is huge for breaking into the USA market

Yes, but remember ... in the relationship between amazon and A2M is A2M only a powerless minnow without any lever to negotiate.

They used to sell A2 Platinum for something like NZD 50 in China. Now I see you can buy the tin at amazon for  for USD 19.99 (i.e. NZD 32.75), and of that amazon will still take a nice bite.

I am wondering what this will do to their (well, A2M's) margins ... ?

Anyway - anything which stemms inflation must be good for the economy. Great A2M is doing this service for all of us ...

[KW]

ATM on the leader board today......up 3.9% or 17c.....seems the decline in the latest Chinese birth rate decline figures are not as large as ATM were predicting...... plus news that A2 is now being marketed via Amazon in USA.

Its quite amazing to think that China's birth rate has halved since 2016.  And 2023 is the second year where total population has fallen.  Maybe they will soon be looking to import people rather than export them as they do now.  All those girls going overseas to study won't be helping their fertility rate. 

• China's population drops 0.15% y/y in 2023
• Birth rate at new low, death rate at highest since 1974
• Total new births drop 5.7% to 9.02 mln
• Total deaths rise 6.6% to 11.1 mln

[Minimoke]

Its quite amazing to think that China's birth rate has halved since 2016.  And 2023 is the second year where total population has fallen.  Maybe they will soon be looking to import people rather than export them as they do now.  All those girls going overseas to study won't be helping their fertility rate. 

• China's population drops 0.15% y/y in 2023
• Birth rate at new low, death rate at highest since 1974
• Total new births drop 5.7% to 9.02 mln
• Total deaths rise 6.6% to 11.1 mln

China, being China, I suspect will start enforcing an increase in birth rate. They are far forward looking enough to know that things won't pan out well in 60 years time with a large aged population with few young ones to support it.