Blue a2 Sky

Well here we sit at an amazing new SP high - what a grand year for a2. Many holders in this forum purchased on the NZX prior to listing in Aus, and others were lucky enough to get in below $1. As we get to these current lofty heights many people have or are considering taking some profit (including myself). My wife and I talked this morning about whether to sell enough to free carry or to just keep holding. In the end we decided not to sell, because we could not find a reason to, other than thinking the SP has grown exponentially.

Here are the reasons we decided not to sell:

1, Growth:
a2 achieved NPAT growth of 198% on revenue growth of 56%, and this is after an investment of $48.7M in Synlait. This growth still boggles the mind, and if you take into account how much margins have improved as the company scales up, the current FY is looking incredibly bright. With IF output set to almost double from Synlait this year, I imagine revenue growth % should beat FY17, with margins continuing to improve, where does that leave us? NPAT 300% growth?

2, New products coming online:
Stage 4 has hit the shelves and is selling well from all reports to date - this increased the lifetime value of our customers by approx 25%. The we add in pregnancy formula and we have increased by a further 25%. Protein powders for sport have also been indicated as an upcoming product - this in itself, if implemented well has the potential to generate significant extra income. We also have chocolate milk released in the US already, cheese in the UK and adult milk powder back online being shipped to China. Our addressable market and customer spends/loyalty due to the a2 beta casein proposition are going through the roof.

3, Geographical expansion:
We all know we have Australia and China stitched up. We now have the UK turning a profit and acquiring customers on milk and cheese products alone. IF was supposed to introduced to the UK this year, however we couldn't produce the stuff fast enough to launch in the UK - as China had swallowed 100% of the product. Now with the Synlait expansion we can look forward to IF revenue coming from the UK as well. Then we have the US. Yes the US is a loss making market at present, however the brand recognition and geographical spread of a2 sales is large. I expect the US to turn losses for another 2 years before working towards breakeven. We need to understand that a2 is a nutri-tech marketing company with an IP moat, not a dairy company - cracking the US will be a stepping stone to global domination. We have also now entered Singapore and South East Asia. I spoke to our assistant in the Philippines the other day who told me she was paying up to $7 per litre of UHT milk in Manilla. Suffice to say - the opportunity for a2 in SEA is massive. We should also remember that a2 has the opportunity to take over the NZ market now. This would be higher margins on the milk already sold in the country, the ability to market it better, introduction of IF etc. We have markets lined up, each to become profitable approx. 2 years after the previous one - WITH NO DEBT! In summary of our current worldwide markets - I can not see how we will not hit $1 billion++ revenue in FY19.

4, China:
The IF market consumption is expected to double in China within 3 years - yes you read that right, DOUBLE. The market is estimated to be somewhere in the vicinity of $35-40 billion USD in the next 3 years. This is occurring at a time when the number of brands and companies selling IF will reduce by 75% - and our dear a2 is the first ANZ IF to receive CFDA registration to take advantage of this. I imagine we should see announcements soon in regard to 'Mother and Baby' store contracts for a2 IF soon. Also remember that the China Label a2 Platinum is a different recipe that commands a higher margin. This also allows a2 to sell a differentiated product to the Daigou and not compete with the directly. A long and profitable relationship with the Daigou will allow a2 IF to reach the farthest corners of China.

5, Supply:
At our current rate, we will start to see milk supply shortages forming in NZ in approx. CY18/19. While many see this as a risk, I see it as the next springboard for a2. I imagine as we speak there is some for of negotiations going on with Synlait / US producers to tap into the massive a2 herds on US soil. Imagine what announcement which says "A2 announces US partnership for guaranteed a2 milk supply for future demand". Yes that would be a rocket ship, on top of a rocket ship.

6, Management:
Our management have proved time and time again they are world class, and thinking at least 5 years into the future. Everything from product quality, sales channels, navigating regulations, customer satisfaction, growing shareholder wealth, strategic relationships and skills acquisition/capabilities to marketing has been thought through, planned performed with absolute perfection. Management have got some things wrong I will admit, but they have reassessed and changed strategy in order to overcome issues - and nailed it from there on. Its this kind of mindset that makes a2 management a powerful force to be reckoned with.

Other factors that deserve a small mention are, dividends, share buyback, a2 health studies coming out shortly, court case with lion, as well as NZ10 and ASX100 rebalances to include ATM/A2m (massive fund exposure). All massive positives.

So, yes - we did not sell shares today when temptation hit. We hold tight in absolute confidence that a2's management will create a truly global company. The truth is, from where we stand right now - no one knows how far this company can go, but one thing that is know is the direction - and it is exponentially up. I was hammered by the likes of Hokey etc 2 years ago for saying "This is why this stock will be $10 in a few years" - well who is laughing now? (Credit to Hokey that he did come around after realising the potential. )

And my predictions moving forward.... I think I might reconsider selling some shares to retires in a few years when the stock is trading above $20. Its all Blue a2 Sky from here baby!!!