A2 Milk Company
Beyond the ticker
A2 Milk ASX: A2M
Please read disclaimer at the end of the document
Introduction
The a2 Milk Company Limited (previously known as A2 Corporation) is a dual listed NZX and ASX 50 public listed company that commercialises intellectual property relating to A1 protein-free milk that is sold under the a2 and a2 Milk brands, as well as the milk and related products such as infant formula.
1.0 Conclusion
Undoubtedly A2 Milk is having extreme difficulties within the market due to the Diagou channel closing. A2 Milk has further to drop in the short term. Long term is interesting, ask yourself when the boarders open will Chinese people flood the market and begin taking baby formula home with them again? If you answered yes, then A2 Milk is one to watch for when the boarders open as earnings will pick back up. If you answered No, then I would avoid purchasing A2 Milk. - Thomas
In previous years, A2 Milk has been performing extremely well year over year. No one could have predicted how much of a detrimental impact COVID-19 would have on the brand. As there is still a lot of uncertainty surrounding the pandemic and travel as a whole, A2 Milks’ diagou channel may still have a few months or even years before it can fully recover. I think A2 Milk is in the position to be able to spend earnings on the market to jumpstart demand, however this will come at a cost to future EBITDA margins and have a huge negative impact on the business. It's for these reasons that my short term view is a sell and my long term outlook is a sell / hold. - Che
2.0 Financial Statement Breakdown
2.1 Majority shareholders
The substantial holders behind the Nominees are Vangaurd group 6.96%, Mitsubishi UFJ Financial Group 6.39% Commonwealth Bank of Australia 6.34% and Blackrock 5.18%.
2.2 Directors and Executives
David Hearn - Chair and Non-Executive Director
David has been the director since 2014 and the Chair since 2015. He has held roles such as CEO or Managing director for fast moving consumer goods markets including, Goodman Feilder, United Biscuits Europe and Asa, pepsico Foods Europe and Del Monte UK. David is also a director of SafeStore holdings, Robin Partington & Partners and Committed Capital Limited. He lives in the UK and has a Master of Arts.
Julia Hoare - Deputy Chair and Independent Non-Executive Director
Julia has a Bachelor of Commerce and has been a director since November 2013. More recently, in 2015, Julia was made Deputy Chair, she is also the Chair of the Audit and Risk Management Comittee. Prior to joining the Board Julia was a partner with PwC NZ. Julia is also Deputy Chair of Watercare Services Limited, and a director of Port of Tauranga Limited, Auckland International Airport and Meridian Energy. Julie resides in New Zealand.
Jesse Wu - Non-Executive Director
Jesse has been a director since May 2017. His most noteworthy achievement is how worldwide Chair position with Johnson and Johnson. He currently serves on the board of visitors for Duke University’s Fuqua School of Business. Jesse resides in China
Pip Greenwood - Non-Executive Director
Pip has been a director since 2019 and is currently a director of Westpac Committee, Spark New Zealand and Fisher & Paykel Healthcare. Prior to this she was a senior partner at the law firm Russell McVeagh, where she spent over 10 years on the board including acting as the firms board chair and interim CEO. Pip has a Bachelor of Laws and resides in New Zealand.
Warwick Every - Non-Executive Director
Warwick has been a director since 2016 and has completed the advanced Management Program at Harvard. His Executive roles include: the Clorox Company of the USA as Senior Vice President, managing Director of nationalPak and Director of Treasury Wine Estates.
Board Rating - 75 /100
3.0 Operations
A2M has two main products: Infant nutrition, making up 78% of sales in Dec-20 and Liquid milk, making up 18% of sales in Dec-20. The other 4% is made up from sales of other products. Below is a breakdown of the sectors A2M earns their revenue from.
4.0 Exposures
You may have noticed a significant drop in the ANZ segment revenue above from 1H20 to 1H21. This 34% drop in revenue comes from the Diagou market, or the resale market where expats buy baby formula in Australia or New Zealand and then take it back to their home country. As the boarders are now closed this distribution chain has evaporated.The decrease in revenue has lead the A2M changing their earnings outlook from $1.8bn to $1.9bn with an EBITDA margin of 31% in September 2020 to $1.2bn to $1.25bn and an EBITDA margin of 11% in May 2021. The Diagou market is having an incredible impact on A2M’s performance and is their biggest exposure risk going forward if borders are to stay shut to international travellers.
5.0 Technical Analysis
From a technical analysis point of view, A2M is a complete disaster, and more downside is inevitable. From 2017 to mid-2020, A2M shareholders experienced capital gains of approximately 866%. Since then, the share price has plunged 61% and looks to continue its current downtrend. Due to macroeconomic factors explained in the fundamental analysis, the decline of A2M shares has been accelerated to its current share price of $8.08.
Point A, B, C & D
Outlines the failed breakout attempts above the resistance line (K). Multiple failed breakouts confirm the strength of the resistance and an investor should use this line to look for a short opportunity. As the price action leads up to Point D, there is a noticeable drop-off in volume which signifies an end of a trend.
Point E, F & G
Illustrates the major support line and enables a clear view of the upward trend that A2M shares were experiencing. Point G shows where price action broke through support on relatively large volume (another short opportunity). Point G also illustrated a failure to break through the downward resistance at Point O.
Point H & I
Point H and I show where price action bounced off descending support. Although this descending support has held up twice, the third attempt may fail due to increased negative investor sentiment along with an increase in potential volume.
Point J
Point J is the most significant TA point as it is the most recent breakdown of support seen in Point M. The failure to bounce off the support line has opened another short opportunity since there are no support zones in the near future until a possible bounce off the descending support zone at Point N.
Overall, a Short position in A2M shares would be an extremely wise play as their core revenue stream (diagou channel) will not be in action for the foreseeable future and will require an extreme amount financing to kickstart it again. Additionally, ratios point out the fact that A2M shares are overvalued with percentages well above the perceived standard. With directors selling and strong downwards pressure through TA, a short at $8.08 will be a wise idea.
6.0 Competitors
7.0 Recent Market Sensitive Information
Half yearly reports and accounts – 25th February 2021
A2M announces that for the majority of group performance has declined including revenue down 16%. EBITDA down 32.2%, EPS down 36.8%, and NPAT down 35.1%. As well as a disappointing half year, management went on to acknowledge high levels of uncertainty surrounding COVID-19 and note that the recovery of its diagou channel has been slower than expected resulting in an even worse FY21 outlook with revenue projected around 1.4B and EBITDA margin around 24-26%.
Organisational Announcement – 10th May 2021
This announcement was relatively brief but definitely significant. On the 10th Mat, A2 Milk announced that Peter Nathan has resigned as CEO of Asia Pacific. Additionally, a search process to consider internal and external candidates will be embarked on.
Trading update and revised FY21 outlook – 10th May 2021
A2 Milk opened this announcement by acknowledging the “challenging” conditions that the infant nutrition market has been experiencing. They also added that the actions taken to address the diagou channels will not result in a sufficient improvement on 3Q21 in pricing, sales and inventory. Additionally, “more aggressive actions will be taken to address excess inventory which will affect FY21 revenue and EBITDA.
8.0 ESG
A2 Milk has received a low CSR / ESG rating of 33/100
8.1 Environment
The Annual report touched briefly on progress and initiatives and improvement of foundations on which a meaningful strategy will be built going forward. No hard details or plans, the equivalent of saying I am pro environment. Doesn’t do a lot considering they are apart of the dairy industry which produces 12% of Australia’s Greenhouse emissions.
8.2 Social
As at 30 June 2020 two out of five directors were females and two out of eight officers were female.
8.3 Governance
Please refer to 2.2.
9.0 Focus Point
In the first half of 2021 A2M had a 34% drop in revenue that comes from the decrease in the Diagou market, or the resale market where expats buy baby formula in Australia or New Zealand and then take it back to their home country. As the borders are now closed this distribution chain has evaporated.
Disclaimer
Advice in the Material is provided for the general information of readers and viewers (collectively referred to as "Readers") and does not have regard to any particular person's investment objectives, financial situation or needs. Accordingly, no Reader should act on the basis of any information in the Material without properly considering its applicability to their financial circumstances. If not properly qualified to do this for themselves, Readers should seek professional advice.
Investing and trading involves risk of loss. Past results are not necessarily indicative of future results.
The decision to invest or trade is for the Reader alone. We expressly disclaim all and any liability to any person, with respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance upon the whole or any part of the Material.
