Stephen Ridgewell published and extensive preview overnight in...

Stephen Ridgewell published and extensive preview overnight in advance of the ATM 1H21 result on Thursday. The result is pre-guided with $181m of EBITDA expected although the key questions for Ridgewell is whether ATM can provide confidence that revenue and margin trends are stabilising sequentially and also whether ATM can diversify its channels to market and defend its brand premium under new CEO David Bortolussi. Clarity on the latter question will take some time, although feedback from our proprietary large daigou contacts suggest that the sequential sales snap back is yet to eventuate. The issues around this important channel are multifaceted but can be best summarised as follows:· Volumes declining - volume trends have worsened in early 2021 with Jan sales -70% yoy (vs. -55% yoy in the Dec qtr) with a much smaller than normal increase in demand ahead of the Chinese New Year period (chart 1)· ATM’s daigou market share has eased – ATM has gone from market share gainer in 2018/19 to holding relative share versus other key daigou brands such as Danone’s Aptamil.· Eroding Price Premiums – The decline in ATM’s price point benchmarked to 1 January 2020 has been more severe than other major brands which could reflect inventory overstocking but also greater A2 only competition (see Feihe’s A2 launch below).· Price cuts have struggled to trickle down – ATM alluded to some prices cuts to restore daigou margins although feedback suggests that these have not yet been passed on from wholesale to large daigou.· Brand spend needs to increase – Feedback suggests that ATM has become much harder to sell with daigou commenting that in addition to price cuts they want ATM to increase brand spend.ATM’s current challenges reflect a mix of industry headwinds but also ATM specific issues. International brand market share has fallen from 56% to 49% over the past two years, driven by i) food safety concerns with consumers concerned about the risk of catching COVID from imported tins ii) regulations that support domestic brands iii) greater nationalism and iv) increasing competition as domestic brands more aggressively target tier 1 & 2 cities. This however does not explain why ATM’s history of gaining share appears to have halted. Whatever the primary driver, as Ridgewell indicates, ATM’s over-reliance on the daigou channel also means it has been more impacted by its collapse. With this in mind we now expect ATM to deliver FY21e EBITDA of $387m, at the low end of the guidance range ($364m - $450m, midpoint $406m) and with the PER still elevated at 31x we prefer to sit on the side-lines at these levels. Neutral rating retained with an updated TP -9% to $10.63 …