Good Old Bell Potter Downgrades from Buy to Hold, page-3

Near term risks need to be considered
We downgrade our rating from Buy to Hold to reflect a number of near term risks that
could emerge as headwinds for the stock over the remainder of CY18e:
Changes to CBEC rules: In Sep’18 the Chinese government announced pending
changes to cross-border e-commerce (CBEC) regulations. Details are limited,
however, we would suggest that regulatory uncertainty has the potential to impact near
term demand from resellers. While ultimately we believe any changes to CBEC trade
that promotes registered products is beneficial for A2M, we highlight the potential near
term volume risk that can emerge when there is uncertainty.
Difficult prior year China data comparisons: On a R3M basis shipments of IMF
from Christchurch have risen +17% YOY and on a R6M basis (which incorporates new
label runs) has grown +40% YOY. However, China YOY comparisons for the next two
months become difficult given 2017 shipments included volumes shipped ahead of the
Jan’18 regulation changes. We are unsure as to how the market may react to the
headline of potentially softer China YOY growth rates from Christchurch.
Insider selling: The recent disposal of ~357k shares by the incoming CEO is
disappointing given the short time frame at the helm. What is notable is that despite
recent insider selling and inaction on the buyback, A2M has recently lifted its stake in
SM1 (Aug’18), perhaps indicating the value proposition in the supply chain.
Investment view: downgrade to Hold
NZ Shipment data to date would look broadly consistent with our expectations for
FY19e, however, our unchanged FY19e NPAT forecast is 8% below consensus. For a
stock with recent insider selling and coming off a FY18 downgrade we see heightened
near term risk and introduce a 10% discount to reflect this. Our target price falls to
A$11.45ps (prev. $A$13.25ps) reflecting this change and updated multiples on China
upside (peer comps). While we downgrade to Hold, our enthusiasm for A2M’s leverage
to the potential benefits of changes to China’s IMF supply chain remains, however, we
view SM1 (Buy, TP A$12.65) as our preferred vehicle to gain leverage to this.