The share price hasnt been this low since 2017
The Company is now targeting revenue for FY21 in the order of NZ$1.20 billion to $1.25 billion. This is down from its earlier forecast of NZ$1.40 billion.
Trading update and revised FY21 outlook
Growth strategy and capital management review commenced
The a2 Milk Company (“the Company”, “a2MC”) today provides a trading update and a revised outlook for FY21. Key points
• The trading dynamics in the China infant nutrition market have been and continue to be challenging for a2MC and many international competitors
• While a2MC’s 3Q21 trading was broadly in line with plan, it is clear that the actions taken to address challenges in the daigou/reseller and CBEC channels will not result in sufficient improvement on 3Q21 in pricing, sales and inventory levels to meet our previous guidance based on April sales being well below plan
• The Board tasked management to undertake a comprehensive review of inventory in the trade and this work has indicated that the level of channel inventory is higher than had been anticipated
• As a result of the inventory review, it is clear that the challenges in the daigou/reseller and CBEC channels have been exacerbated by excess inventory and difficulties with visibility
• In the interest of the long-term health of the a2 brand and the medium-term trading outlook of the business, more aggressive actions to address excess inventory will be taken which will impact FY21 revenue and EBITDA, and potentially 1Q22
• The inventory management actions being taken will provide Chinese mothers with the freshest infant milk formula and benefit the Company’s customers, distributors and partners
• The Company will also increase marketing investment in 4Q21 and into FY22 to drive consumer demand
• Despite these short-term setbacks, the Company remains confident in the long-term opportunity that the infant nutrition market in China represents, and is determined to build on the strong position which the Company has built within this market over the past five years
• However, the Company recognises that the China market and channel structure is changing rapidly and has therefore commenced a comprehensive process to review its growth strategy and executional plans to respond to this new environment
• In addition, the Board is actively considering capital management initiatives, including a potential share buy-back and an update will be provided at the full year results in August
My thoughts: A2M is stuffed. Structually challenged, with a lot of issues and headwinds going forward. With rise of Chinese local brands, non exisitance of diagou channels for the foreseeable future, and massive inventory stockpile issues, dont see a turnaround any time soon. Shame, as I loved its business model being a capital light marketing business like Coke.
Getting out of it from my RL portfolio today. Tough lesson learnt - Cut losses early and dont hang on in the hopes of a recovery in face of multiple downgrades, even though the business was once a highflyer blue chip market darling...
I am going to stick my neck out and go out on a limb and based on recent trading and reviewing other fundamentals such as chart and so forth, I believe that A2M has turned a corner. As such, will probably be one of the few to say that I am now bullish on the company
Reliance on china Diagu channel highlighted.
I see significant risk and lower ROE and ROCE from moving into manufacturing (rather then outsourcing product creation)
Would like to see significant traction in USA. Originally brought at $1.64 in personal portfolio.
Thesis is Changing (changing from Sales / R&D / Capital light business into capital intensive (Manufacturing)
The outlook for fiscal year 2021 relies on a significant improvement in the daigou/re-seller channel. We believe any material improvement in the near term is unlikely.
I don't know how to approach this company.. the scientist and medico in me knows there's no convincing health benefit to this product
.. and even industry sponsored research such as this can only equivocate as to potential benefits
It's been fascinating to see the research pivot to the Han Chinese genotype for lactose intolerance, despite the fact that A2 is a casein protein, not a lactose sugar.. it smacks a bit of a solution in search of a problem, and I always look at sponsored reasearch carefully
Families will approach me for opinions as to the superiority of this product, so the message is certainly out there.. even a relative in the agricultural sciences arrived at the same conclusion about the health, but still bought shares (disclosure: I don't own them) because the dynamics of the company were too attractive.
TLDR - it's a taste decision rather than a convincing health based recommendation to use this product
Disclosure-I have a small holding, have been looking to add more.
The last result displays how much A2 relied on the retail daigou channel. this has been almost wiped out and IMO the big question going forward is will this channel re-establish itself and will it be as relevant.
Smaller biz's like US and Aust Liquid milk doing ok. Brand still strong in China in IMF. Mgt trying to clean up inventory situation, took a $23m provision (enough?). Progress in MBS was good, although i consider this a good biz not a great biz. Corporate daigou seeing some green shots?
Business momentum still negative, downgrading. Sales poor which is understandable given the situation but hard to accept mgt's initial bullish read. Hard to see high profitable growth without retail daigou, ie channel mix is deteriorating, mainly because retail daigou was so high. that is good but not great. the recent acquisition of MVM looks overly optimistic given the lower growth, hard to see it making sense in next several years. CBEC channel is problematic, pricing poor and inventory slooshing around. same for everyone. Competition has become tougher but with A2 at 2-3% share still room to grow.
WHERE TO FROM HERE
I think it is now obvious that the retail daigou channel made A2 a great biz and without it A2 is only a good biz. will this channel come back? probably needs intl borders reopened, which is not soon. will it still be as efficient and profitable?..dont know ..maybe. I think A2 is a good biz but I would like to buy it without paying for the retail daigou return. so that becomes the big potential upside. My best guess of this is good risk adjusted buying $7.50-8.
this is only an opinion not advice. DYOR
After listening to a case study on Monster energy I was motivated to run my eyes back over A2Milk. They have a similar business strategy as mainly a marketer of their product, staying mostly clear of farming and manufacturing and perhaps they have a similar potential to become a 100 bagger over the long term. I invested at 1.75 and sold at 15.2 in February last year due to fears over the risks to further sales growth Vs their valuation. There was also the consideration that lots of high quality businesses were selling at a large discount at this time whereas A2M was comparatively shooting the lights out
My fears were a) increase in demand being experienced at the time for baby formula would be followed by a drop in demand (since realised) and b) their expansion efforts in North America is unlikely to be successful.
I had been living in North America (all around the West coast & BC) for the last 18 months and discovered that finding A2Milk on supermarket shelves was very difficult. In NA they have A LOT of different milk products making up a lot of total shelf space and A2Milk always had a spot the size of one milk carton that was hard to find and full to the back with A2Milk. Wooshaa recently posted on hotcopper a photo of 3.5L A2Milk selling for $1.97 at Costco, if they have resorted to this level of discounting to move milk then it seems at least some part of the NA expansion strategy has failed.
The third thing which I didn't foresee and probably creates the biggest risk is the temporary loss of daigou resellers due to a lack of Chinese students and tourists in Aus. I had thought up until now that they were simply arbitraging formula between Aus and China but it seems they are impacting sales at a level which suggests they are actually also an important marketing asset for A2M in China.
So we have a potentially failing NA expansion (Jury not quite out yet but I have suspicions), pantry de-stocking creating pause in top line growth and inventory stocking level risk (potential write-downs?), temporary elimination of daigou hurting sales in Aus and marketing in China and we have a share price almost 50% down from its 52 week high. The silver lining is that they are reportedly maintaining their brand reputation and awareness in China.
I see an opportunity brewing here, but no rush to re-enter considering they are forecasting a drop in revenue year on year and I would like to see Chinese tourists and students returning to Aus before reinvesting as who knows how long this will take. The situation could get worse before it gets better. The bottom line though is that they are still a high quality company, maintaining their brand reputation, now trading at a reasonable PE of 25. When I can see a clear path to typical A2M style growth returning I'll be interested to run a valuation and see where it stands
Guidance downgraded today resulting in 24% drop in share price. Impact on sales and distribution from COVID has been worse then anticipated especially in the baby nutrition component of the business which had been performing strongly. Interestingly Chinese loyalty to the brand still appears to be strong and other products are performing well in Aus and US.
Current feelings are a possible market over reaction for an otherwise good business. Has been a great company but experiencing strong headwinds in the past 12 months. I think it has the moat and loyalty to survive in the long run but would need to be held for longer now possibly to let the thesis play out. Unlikely needing to rush in too soon.
Not sure if I'm over looking anything?
Although A2M has a strong brand, I'm quite bearish on the outlook for the company for the short term. Reasons are the recent insider selling and the clumsy release of updated numbers on the impact of the Victorian lockdown for the Daugou channel. Unless I missed something, I think the Victorian lockdown impact should have been better highlighted in the FY presentation. My position got stopped out but I may revisit if it falls below $14 again.
I'm surprised by the lack of negativity towards management following their outlook update on the 28th Sept. 3 weeks earlier their investor presentation had been very positive with little indication of this down grade. Reports for insider selling also leaves a sour taste. What am I missing? Why do I feel miss lead and ripped off? Management trustworthy?
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.
Not good for A2M ...
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 livewiremarkets.com "wire" ---
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.
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.