Just want to lay all the (known) facts down.
- Prior to Covid19, many were under the impression that this business operated mainly under three distinct geographies. Australia/China and other Asia/USA. Turns out the majority of sales (I dare to say 80%) go to China, either directly or indirectly.
-Daigou sales were running at $250M pre-Covid. Now they are essentially 0. This has a net effect to CBEC, since the Daigous also function as free marketers (pretty much this business was literally built around Daigous which promoted the brand). Daigou shops/centres are primarely based in Melbourne and Melbourne has been under lock-down for a looong time (still is).
-It appears that a lot of the issues come from increased inventory. Spurge in demand during Covid first wave (pantry stocking). Then, management made the call to increase investory during Covid to cope with a possible increase in demand due to a second Covid wave. Turns out that was a very bad call, since not only sales were brought forward (pantry de-stocking) but the supply chain (Daigou and CBEC) got disrupted.
-Following on from point above, they got left with thousands of tins that they couldn't sell fast enough. Hence, to avoid discounting (which could ruin brand equity/reputation for primum products, as it happened with Bellamy's), they had to destroy a chunk of this inventory. Hence, the 90M write downs. [to be noted that, due to this write down, margins are low at 10pc. But, if this one-off item is ecluded, then they still get to those 18/20pc margins-EBITDA].
-Demand was subdued due to people being in lock-down, pantry de-stocking, lower birth rates (probably as a result of Covid, although, been in decline for a while).
So, supply & demand stuffed up by Covid [and by managemnt's poor handling of the situation and tby adverse currency].
On the positive side:
- IMF market in China alone is valued at 55B (US dollars) and growing at 5/6%.
-A2's market share (according to their metrics) has stayed constant during this tough period and, in fact, it appeared it has slightly grown (primarely China lable, I believe).
-A2 come from a very low % of the total market.
-So far, it has still a strong brand. From the last scuttlebutt I have done, it appears the brand is still very much loved.
-Tonnes of cash and zero debt.
-New CEO with experience in turn-arounds (wouldn't rely too much on this tho').
-US business could be growing fast.
I will keep reading this over and over, before coming to a buy or sell decision. However, it appears that, although the SP could go lower, there could also be a lot of upside if they quickly fix all of the problems in their control, they could start growing at 10/15% again.
.... Very hard one!
