We would both agree that the share price is not reflective of the intrinsic value but merely where supply meets demand on any given day. My investment style is based on downside risk protection and for that intrinsic value acts as a solid foundation on which I can build an investment thesis and hold for the long term. I understand it’s not for everybody and does require a longer time horizon than many people are comfortable with.
On hindsight my wording was probably not great. I agree this will be volatile for the next little while and I have no insight on where it might go from here for traders. You are right, there are others on here that are far more skilled in that area. My calculation was not reflective of my sentiment on the intrinsic value of the business but rather was an attempt to outline how the current market view is in fact based on the latest fundamentals.
Looking forward, the question for all of us ‘investors’ is whether these fundamentals are reflective of a new norm or whether they are the confluence of a set of circumstances at a point in time that can be addressed through a combination of open borders and management guile. If we are honest none of us know. The last update felt to me like management were cleaning out the all the skeletons from the closet (even the finance team contributed, managing to expense in the current year a previously capitalized cost). On the demand side, my inclination is that the same ‘Average Chinese Mother’ that was so eager to stock her pantry with A2 did not get a dose of nationalism in the time it took her to empty it, whilst at the same time her traditional sourcing route shut down. It does feel like a classic case of narrative following price but of course I could be wrong.
When offered the opportunity to purchase a consumer staple brand, with a global runway, a capital light operating model and a proven track record of generating a high return on invested capital, at a price reflecting a low multiple of pessimistic fundamentals, I am willing to underwrite a number of potential outcomes.
Oh and I made a small adjustment to my previous calc – pesky tax rates
Back-of-the-envelope valuation based on latest downgrade:
Bear
Base
1
2
Sales
1,300
1,300
3
EBITDA %
22%
22%
4
EBITDA
286
286
5
6
NPAT
206
206
7
NPAT %
16%
16%
8
9
Shares
743
743
10
11
EPS NZ
0.28
0.28
12
EPS AUD
0.26
0.26
13
14
Cash Post Acquisition
470
470
15
Cash Per Share
0.63
0.63
16
17
Multiple
15.00
20.00
18
Estimated SP
4.50
5.79
A2M Price at posting:
$5.46 Sentiment: Buy Disclosure: Held
(20min delay)