Fair value atm assuming a P/E ratio of 50-60 (which is historical Pe levels) and ebit of 35 million (net income around low 20 mil) is 1.60ish. This is also what the SP has trended towards after all the hype has died down. So I think 1.60 or so fair value is accurate given no new information. Now let's look to the future. Infant formula industry growing from 16-18 billion in China to around 40 by end of 2017 (quite a few articles have said this). Assuming market share remains the same (lets follow a rather unbias assumption of a2 staying competitive but not overtaking aptimil). That should translate to double the EBIT for China by three years. This figure will be massive... Times the figure we get in FY16 China ebit by 2. UK expansion looking to break even first half of FY2017 but I believe sooner as management is being conservative. US expansion has another year of capital outflows (7mil) left and should be able to break even eventually in worse case scenario. I'm not taking US possible massive success into my calculations at all.
As to why $2-$3 after feb, it's simple. A2 stock usually trads sideways until announcement and then rockets before coming down to earth. Assuming same thing will happen... Fair value will shift from 1.50-1.70 to $2.1-2.3. Add in the hype train and over valuation with the markets inefficiency (like last run up) and we should be able to hit high $2. As to why fair value will be $2.1-$2.3 its based upon my hypothetical new guidance given by a2 company. This is from lots of research into the firm and current demand trends. We have around $70 mil expected IF sales for first 6 months from last update. If we predict the last 6 months of IF sales will be December figure + a conservative growth rate (this can be achieved from new supplier deals as well as even higher demand in China due to removal of one child policy and continued brand awareness). December IF sales calculation :
"The Company experienced a significant uplift in sales of infant formula in the month of November, exceeding the sales projected at the time of the previous forecast. This is expected to continue in the month of December. We now expect sales of a2 Platinum® to be approximately $68 million for the six months to 31 December 2015."
We also know first 4 months is 38 million sales.
" Group revenue for a2 Platinum® infant formula in the four months to 31 October 2015 totalled approximately $38 million"
So basically they are expecting 30 million IF sales for November and December 2015. They said November was very strong and expect it to continue the same trend in December. Hence apply 15 million If sales for December. Take a growth rate of 5-10% a month (conservative) and you get fy16 IF sales of around 180 million. Add in 150 mil revenue from the milk side and other products and you get 330 mil revenue. So that's another 20 mil revenue from mid point of latest guidance. This should go mostly to EBIT as did the last revenue increase (see November to December announcement ebit movements). So EBIT should be 45-50 million (using ebit growth from 20 million more revenue - based upon last 2 announcements).
Nopat = 30 million (conservative)
Eps = 30 mil/700 mil
Sp = 2.15 with 50 PE
A2M Price at posting:
$1.68 Sentiment: Buy Disclosure: Held
(20min delay)