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Last edited 4 years ago
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#The A2M-China link
stale
Last edited 4 years 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.

AUGUST 2020 UPDATE:

A2M to conduct due diligence around the purchase of 75% of Southland-based Mataura Valley Milk for NZD 260m. The other 25% is owned by China Animal Husbandry Group.

From the announcement:

"The exclusivity arrangements are supported by MVM’s current majority shareholder, China Animal Husbandry Group (CAHG), whichwould retain a 24.9% interest in MVM alongside a2MC under the terms proposed. CAHG is a wholly owned subsidiary of China National Agriculture Development Group, which is also the parent company of a2MC’s strategic partner in China, CSFA HoldingsShanghai, Co., Ltd. (China State Farm)."

This would further strengthen the relationship between a2MC and China.

#EPS trajectory
stale
Added 4 years 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.

 

#What to do with all that cash?
stale
Last edited 4 years ago

Sitting on around 1/4 billion in cash. People often ask, "when are ATM going to pay a dividend?".

Personally, being a young investor with a steady income, dividends don't hold much appeal for me. But other/older investors may be counting on ATM being a significant income source in the near future.

So what are the options for this company?:

  1. further investment in Synlait? ATM already own enough to block a takeover, and I believe any further investment would be a poor use of cash.
  2. invest in another milk processing company? Maybe a blocking stake in several other key partners. Suppliers in other countries to spread risk and increase market access?
  3. dividend? For me, I feel that ATM could get a better return on the cash than I could get, especially with a chunk going to the tax man.
  4. investing in own manufacturing capabilities? They could purchase a canning facility or complete milk factory. It could be a sound move at some stage but will change their business model and asset base quite significantly.
  5. share buyback? I really like the idea of share buybacks and would much prefer this to dividend payments, especially while growth is so strong.

Would love to hear any others thoughts on ATM's cash - just reply in the forum section if you'd like to discuss.

#Business Model/Strategy
stale
Last edited 4 years ago

The a2 Milk Company currently sources it's a2 milk from Canterbury-based company Synlait.

In fact, a2 Milk's main product line - the a2 Platinum infant formula range - is produced and tinned by Synlait. This makes a2 Milk effectively a marketing/reselling company, which is capital-light high-margin business compared to traditional dairy companies.

Synlait has built a new factory in the North Island (currently on hold due to land title disputes) which will double a2 production potential.

a2 Milk will take product from other suppliers to diversify its product range and increase potential for growth. However, only the IF from Synlait has approval for the Chinese market.

#What is a2 milk?
stale
Last edited 4 years ago

About a quarter of milk protein is beta-casein. It is thought that, long ago, all beta-casein in cows milk was a2. One day, a gene mutation resulted in the production of a1 beta-casein, which has a different shape.

The presence of a1 in the gut can exacerbate lactose-interolerance.

The traits are codominant - a cow with both the a1 and a2 allele will express both, making milk with both proteins. Only cows with two a2 alleles will make the desired a2-only milk.

To make a2 milk, a factory has to take milk from a farm which is only milking a2a2 cows and process it separately.

The process of making a herd of cows soley a2a2 involves DNA testing all cows and heifers (specific a2 DNA testing has often been funded by milk companies). If the farm is part of a larger group, shuffling cows between herds may be sufficent to provide the farm with enough a2a2 cows. The second option is to buy and sell cows to quickly acheive a2 status. The third option is to gradually breed for a2 - selecting only a2 bulls and cows to breed replacements, and to preferentially cull cows with a1 alleles. A higher replacement rate (number of heifer calves kept to replace cull cows 2 years later) will facilitate this - 25-30% compared to a typical 22%. Keeping some extra a2a2 carryovers (non-pregnant dry-cows kept for a season to breed again instead of culling) can also contribute faster accumulation of an a2 herd.

Often a farm will use several of these options and reach a2 status in about 2-4 years. Some big corperates can acheive a2 status in some herds in a single year by shuffling animals.

A premium is paid for a2 milk, making the process worthwhile. There has often been a waiting list in the past to ensure supply doesn't outpace demand (or processing capacities).

#A star business
stale
Added 4 years 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.