Active Member Straws
#EPS trajectory
Added 3 months ago

I've been considring my current A2M investment and decided to plot EPS.

The power trend line (best R value for current data points) predicts and EPS of NZD 1.72 for 2025.

If a linear trend line (poorer R value) is used, EPS is NZD 1.2 for 2025.

At a PE of 30 and discount rate of 10%, current fair value estimate range is NZD 22 to NZD 32.

Throw in a buy-back and I'm happy to put a fair value estimate of NZD 25 on A2M.


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#competition using brand
Added 2 months ago

Not good for A2M ...

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#The A2M-China link
Last edited 3 months ago

With increased concern around trade with China and the tightening of regulations in China regarding IF, I thought I'd point out the significant link between A2M and China, which may help protect A2M's Chinese market share somewhat.

All of A2M infant formula sold into China is manufactured, canned and labelled by Synlait in Canterbury, NZ.

The biggest Synlait shareholder is Chinese company, Bright Dairy, which holds ~40%.

A2M recently increase their shareholding in Synlait from 17.4% to 19.84% (good timing, at NZD 4.95 per share, now NZD 7.00)

Synlait hold exclusive rights to supply A2M's Chinese products until 2023.

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#Fundy/Analyst Views
Added 2 months ago


Matt Joass from Maven Funds Management:  a2 Milk: The Story of the 2,200% Monster Next Door

"This is the story of how a little company from New Zealand grew to become a 14 billion dollar giant, the signs that indicated a big future ahead, and the tale of one of the greatest blunders in Australian business history. It is also the story of how we can apply the principles of what I call monster hunting to our own investing, and use the lessons on our quest to find the next potential winner while it is still small and undiscovered."

--- click on link above for the full "wire" ---

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#A star business
Added 8 months ago

From Richard Koch's The Star Principle

"Be willing to accept lower profits to build a dominant market position. As long as you remain cash-positive, short-term profits are totally irrelevant to the long-term value of the business." (e.g. aggressive marketing spend by A2M)

"Since you probably won't be investing in factories, offices or other physical cash sinks, what's left is expense investment - the costs of your people, plus eternal marketing"

"...the nub here is that you should generally 'outsource' as much of your operations as possible, retaining only the few things that you do uniquely well. In particular, get other people to make thing for you." (e.g Synlait)


Thanks to member Star for the book recommendation (although it's a little cheesy/gimmicky in parts, it has some great insights).

Many investors have missed the early stages of growth in this story, but A2M is a star business and still has many years of growth ahead.

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#Bear Case
Added 2 months ago

See attached PDF for full analysis


I decided to do an analysis of A2M using only financial data up to 2015 in order to see if my framework would have caused me to buy the company and realise a multibagger as a result. 

2015 Verdict: Don't Buy

The framework says they're not a buy on 2 fronts - past performance and cheapness. They have not been good stewards of capital at all for free cash flow return on capital employed. On average the operating income return on capital employed at the start of the period is great, but end of the periord is terrible. This is a strange outcome which requires further thought. They are also very certainly not cheap at the moment mainly because operating income and free cash flow have died off in the past two years, presumably because of the costs of expanding into new markets and listing on the ASX. Balancing these observations is the bright future. In this particular instance, the bright future came true and they went on to grow free cash flow strongly each year and rode a wave of high popularity in China. The lesson learnt is to consider the significance of the future. If it is bright, it can mean hugely positive outcomes, even when it looks like they have been poor stewards of their capital due to low returns in the past. If that was merely a product of setting up the business for success, then that poor return on capital situation may turn around if the bright future one has identified comes true.

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