Changes to forecasts: We have reviewed our underlying assumptions for both A2M and SM1 following the recent results of both companies and the recent announcement regarding CFDA registration for the A2M branded IMF products. Major changes are highlighted below:
SM1: We have upwardly revised our volume forecasts for A2M IMF products in FY18-20e, deferred commencement of Munchkin volumes until FY19e, and reviewed our margin assumptions for base ingredients and IMF following the FSF results. The net impact is NPAT upgrades of 5% in FY18e, 11% in FY19e and 22% in FY20e. We also raise our target price to A$7.15ps (from A$6.07ps) and retain our Buy rating.
Two stocks one dream: At this stage of their development A2M and SM1 are effectively tied to one another, with SM1 largely dependent on growth in demand for A2M branded products in Australia and China. Over time we expect both businesses to evolve, with SM1 expected to benefit from customer diversification in New Hope, Bright and Munchkin while transitioning its milk pool to higher margin IMF products. In the case of A2M we see the scope for geographical diversification of its IMF business as the fresh dairy business evolves in the US and UK as well as the scope to more aggressively enter adult nutrition markets to capitalise on its evolving differentiated functional food offering.
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A2M Recommendation:
Buy (unchanged)
Previous Close:
A$6.91
Price Target:
A$7.80 (prev. A$5.51)
1
SM1 Recommendation:
Buy (unchanged)
Previous Close:
A$6.22
Price Target:
A$7.15 (prev. A$6.07)
SM1 Price at posting:
$6.50 Sentiment: Buy Disclosure: Held
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