Fund Mgr notes

From OC Premium Small Cpys Fund August update.

Portfolio stalwart, The A2 Milk Company (A2M, -20.9%), had a challenging month and was sold off heavily at its full year result after announcing that its FY20 gross margin would flatline, largely as a result of increased marketing investment geared towards building the company brand internationally for the long term. Analyst consensus had been factoring in ongoing operating leverage into FY20 and investors took a dim view of management’s strategy of increasing investment to build market share in the US and Chinese markets over the longer term. As investors, it is sometimes difficult to reconcile the trade-off between tangible short-term gains versus a longer-term strategic investment. In FY20, management will spend almost NZ$200m in FY20 marketing the A2 brand in the world’s two largest consumer markets with an eye to the future and we view this as a sensible strategy given the quantum of the opportunity in both of those markets. In the US, A2M recorded an EBITDA loss of NZ$44m in FY19 but revenue grew by an impressive 160% to NZ $36.4m and the company is making steady progress in building brand awareness and increasing distribution with A2M products now stocked in 13,100 stores. Over recent years, A2M has grown from a New Zealand based micro-cap stock into an ASX100 company and, despite the rapid growth, the increase in share price has not been linear. We continue to back management’s strategy which ought to deliver a strong medium-term growth trajectory for the business. We will be attending the A2M’s strategy day in Shanghai later this month and we are also meeting with a raft of associated businesses to better understand the opportunity that lies ahead for A2M, particularly in the US and China.