Should I Buy A2 Milk Shares? Highlights
The share price of A2M has been bid down massively, with no signs of recovery. The fundamentals remain solid if the company can get its market strategy back on track. Does the current share price present a massive opportunity for A2M or is this catching a falling knife? Should I buy A2 Milk Shares?
A2 Milk Shares Price
Shares in A2 Milk have fallen drastically from their pre-COVID highs, with no signs of recovery. Today the share price is trading around $6.03, which is down 66.56% over the last twelve months, and down 70% from its all-time high of $20.05 (18th June 20220). A2M has been trending down sitting at the lower end of its 52-week range of $5.04-$20.
These moves leave the company at rock bottom prices, not seen since 2017. The A2M crash has wiped $10.4 billion dollars off the market cap, valuing the company at $4.475 Billion.
About
A2 Milk operates in the commercialization of A1 protein-free branded milk and related products. Their products are sourced from cows specially selected to naturally produce milk with only the A2 beta-casein protein.
They have products and trading activities in New Zealand, Australia, Greater China, North America, and a selection of emerging markets.
Australia and New Zealand are the company’s established markets. A2M shares became popular due to their massive growth in exporting infant formula to the Chinese markets.
A2 Milks revenues primarily consist of its infant formula products (78% of total revenue in 1H21), while its liquid milk products are a smaller, but still a significant contribution to the business (18% of total).
A2M is dual listed on both the Australian and New-Zealand Stock Exchanges.
The Latest Targets
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. A2M expects it to take some time to rebalance inventory levels and restore channel health. The Company is expecting an earnings to sales margin for FY21 in the order of 11% to 12% (excluding MVM transaction costs).
A2M plans to significantly increase advertisement spending with a reported ‘high level of marketing investment’, with a ‘significant’ marketing campaign in China slated for 4Q21. To try and move its current oversupply of stock. The business wrote down $90 million in out-of-date stock
Due to the ongoing impact of coronavirus, we don’t see any significant return of revenues until the return of international travel and the easing of Australian-Chinese trade tensions.
Financials
Historical Data
A2M has seen its revenues rise from $0.352B in FY16 to $1.732B in FY20, representing a CAGR of 48.9%. During the same period, the Company has seen a normalized net income CAGR of 88.9% and a free cash flow (FCF) CAGR of 113.4%, with most of the growth from their Chinese consumers.
Meanwhile, the Company had a return on equity between 30 to 50%, whilst being completely debt-free.
Half-Yearly
A2M released the following half yearly highlights in February:
- Total revenue of $677.4 million was down 16.0% and EBITDA of $178.5 million was down 32.2%.
- Challenges resulting from COVID-19 disruption experienced in the daigou/reseller channel.
- Strong performance in China label infant nutrition, with revenue growth of 45.2%, an increase in market value share to 2.4%.
- Solid performance in liquid milk in Australia with 16.3% revenue growth driven by higher levels of in-home consumption and a record value share of 11.7%
- Finalized binding agreements for the proposed acquisition of a 75% interest in Mataura Valley Milk (MVM), which will provide supply diversification, further strengthen relationships with key strategic partners in China, and offer access to manufacturing margins over time.
The China Story
The issue started in 2008 after the official release of China’s Ministry of Health’s update, saying nearly 300,000 babies were sickened after consuming melamine-contaminated infant formula.
Following this, it’s no surprise the Chinese consumers had severely lost confidence in the industry. As a result, the international import of infant formula moved to fill the massive void. Euromonitor reports that the market scale of China’s infant formula is worth $31.12 billion, this accounts for about 50 percent of the global market.
In China consumers are also willing to pay a premium for quality international products, fetching around 22% extra on average.
This insane demand led to the famous montages all over Aussie news of daigou shoppers stripping supermarket shelves to export the product back to the Chinese consumers.
China is a massive component to the success of A2 mIlk. Last half year A2 revealed further strong growth from their Chinese market with their China label infant nutrition products, with sales of $213.1 million, an increase of 45.2%. These sales account for just under half of the group’s revenues.
However, after account for both direct and indirect sales systems to China accounting for the diagou and e-commerce sales, it is estimated that up to 80% of sales go to China.
Pre-COVID Daigou sales were fetching around $250M. With the international lockdown, this has practically ceased to 0. Diagou’s also benefited the brand through their own advertisement campaigns to sell the product. We can see how COVID has caused A2M to come to a grinding halt and destroyed the share price over the last 12-month.
To further add to this, the initial COVID reaction caused a surge in demand for the product causing management to increase inventory. However, once the supply chain got disrupted this left the company with a tonne of expiring product they had to destroy at a loss of $90 million.
Despise this A2M still holds a well-respected strong brand. Their market share has stayed constant, and even slightly grown during this tough period.
Prophet’s Take
It’s no secret that investors have been stung by the collapse of A2’s Share price, but this in itself isn’t a reason to avoid the company. Some of our greatest buys have been during tough times.
“BeFearful When Others Are Greedy and Greedy When Others Are Fearful”
Despite the barrage of downgrades and bad news we can’t overlook the simple facts;
- Revenue is still expected to exceed $1 Billion (significantly higher than they were in 2017 at the current market cap, $500 Million)
- The Company is completely debt free and has significant cash on hand ($854 Million)
- In relation to their current PE (14.3) and book value of $1.45 the current share price is quite attractive
We are closely monitoring A2M share price and are considering buying more shares. We did very well in the early days of A2M around the 2017/2018 mark. Our current holdings are down, but we see $6 as a hard to resist price. At the moment we will be standing on the sideline waiting for their full-year results in August. We are Undecided on A2M. Over the long term, we are BULLISH, but there may be more losses before then.
Full Analysis: https://prophet-invest.com/should-i-buy-a2-milk-shares
