Done this before with a previous company and had some great feedback so doing it again!
Thought I might start a thread where posters can post their in-depth analysis’ on A2M, I’ll start !
My analysis will try to cover both qualitative aspects and quantitative aspects, but keep in mind this is just my opinion, I am no professional (in fact, just a lowly Uni student), but I do this for fun because I find it interesting and because I enjoy it
(Disclosure: I currently do not, and have never previously, owned A2M shares)
Too much detail or not enough? Let me know what you think! Any feedback is great feedback!
Description:
The A2 Milk Company Limited (A2M) is engaged in the commercialisation of intellectual property relating to a2 brand milk and related products in New Zealand, Australia, United Kingdom, China and the USA. A2M also sources, produces and supplies a2 brand milk and milk related products in Australia & abroad. The product comprises of Liquid Milk, Infant Formula and other dairy products which include Cream and Yoghurt. (Source: Commsec) For the best overall description see their website: https://www.thea2milkcompany.com/about-us/
Management: A2M’s current CEO Geoffrey Babridge has been at the helm of A2M since September 1, 2010. He has had over 25 years senior management experience working in the Australian Fast-moving consumer goods industry, originally a chartered accountant he has previously held senior executive roles with Freedom Foods Group Limited (A2M’s biggest shareholder with 17.83%), Bunge Defiance and National Foods [11]. At the last notice date at 31/12/2015 Babridge held 11,000,000 direct shares in A2M and 3,500,000 indirect shares in the company. (Source: Commsec)
Other management with skin in the game includes Melvyn Miles 184,147 direct shares (as at 09/11/2015), Julia Hoare 50,000 direct shares (as at 19/11/2015) and David Hearn 100,000 shares (as at 14/10/2015). For me having management with a direct interest in the business they work for is a huge plus that they have faith in the company’s future.
If you look at the Reuters site a lot of A2M’s senior level have had previous experience within the FMCG industry and in supply chains, I think are well poised to make the most of managements expertise and through Babridge’s guidance at the helm.
Past Financial Summaries
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
0
(Keep in mind, all in NZ$)
2015 [5]
2014 [4]
2013 [3]
2012 [2]
2011 [1]
1
Trading Revenue
$155,100,000
$110,600,000
$94,304,000
$62,458,000
$42,297,000
2
NPAT
(2.1)
0
$4,120,000
$4,405,000
$2,116,000 (Note: A2M Maiden profit)
3
EPS
N/A
N/A
0.66
0.74
0.40
4
ROE
N/A
N/A
6.9%
11.8%
8.4%
5
Shares on Issue
660,100,000
(source: Commsec)
N/A
649,666,979
(21/08/2013)
604,666,979
(31/08/2012
590,666,979
(31/08/2011)
Note the reason for the drop off in NPAT for FY14 and FY15 is due to the increase in costs associated with expanding into Chinese, UK and USA’s markets.
Consistently trading revenues have been increasing YOY, hopefully this trend continues, as long as A2M keeps expanding and entering new markets I am not concerned at this point in time about the lack of NPAT but I will assume and hope sometime in the near future once established they will begin focusing on maximizing profitability and the return on equity.
Summed up my basic likes and dislikes about A2M: What I like: -Competitive Advantage: Having high quality, premium product with strict quality control as well as owning the IP relating to A2 branded milk, means that consumers from all around the world know exactly what to expect when purchasing A2M branded products, putting them above and beyond other dairy companies.
-Management: Mentioned already but a few key execs have skin in the game a lot have a long experience with the FMCG industry, setting themselves up well for future growth in the industry. A big plus in my opinion. -Infant Formula: Put simply, this is huge market. Since the Chinese Milk scandal of 2008 [7], Chinese consumers have been wary of their products, increasingly turning to overseas products for themselves and their families.
I note in my analysis further below that Infant Formula makes up 27% of A2M portfolio, yet Infant formula now accounts for ~47% of total group revenue (FY16 forecast) [5] page 21.
-Debt: None, nada, zip. Having no debt is a huge plus for me; personally I’m not a fan of companies that are funded by debt. While I’ll acknowledge that debt used properly can effectively increase the return on equity and increase the rate of return, but if assets were to fail or produce less than desirable returns at least a company with minimal debt can wade the waters of uncertainty more easily than one burdened with debt obligations. -Ties: A2M’s infant formula range with their NZ manufacturing partner Synlait Milk. A2M also has ties with China State Farm (a chinese state-owned organisation) who are A2M’s exclusive import agent for China.
A2M’s premium chinese label infant formula is available in a number mother-baby stores in more than 50 cities across China, as well as being available through E-commerce stores like Tmall Global and JD Worldwide. [9]
It has also been speculated that JD.com – A US$34 billion dollar company listed on NASDAQ – has been considering buying a stake in a2. [10]
Enough of the positives, here's what I don't like: -Lack of Diversification: As of FY15 [5] page 10, A2M portfolio composed of Fresh Milk (71%), Infant Formula (27%) and Other Dairy (2%). While I do like the fact A2M has focused on one sector, are doing it well and have chosen not to extend their branches too far & wide, I also find it a little worrying at the same time. Hopefully in the future they decide to extend their presence into other industries, therefor reducing a little risk by not having all their eggs in one basket. Although A2M have mentioned they would looking into extending a2Milk™ into new product categories. [6] Page 10.
-A2 Milk in general: It’s fair to say A2 milk has a few skeptics about its credibility and claims saying that some of the health claims of A2 milk are premature and irresponsible [12 & 13]. Also claiming that Curtin's study was too small to support a2's claims. More clinical trials and overall sales of A2M I think will ultimately decide this factor, very interested to see how this actually turns out.
If you’ve read this far, thank you so much ! And if there's any mistakes, I'm sorry!
Keep in mind I am not a professional! DYOR
See my previous analysis here: BFC - http://hotcopper.com.au/threads/bfc-analysis.2693150/
A2M Price at posting:
$1.65 Sentiment: None Disclosure: Not Held
(20min delay)