Originally Posted by
Snoopy
The question is not: "Does ATM have sufficient raw material supply for the business plan?"
The question is: "Does ATM have sufficient milk supply to meet the investor expectations implied by the current share price?"
It is quite difficult to get information on volume of milk supplied. This statement came with the annual result for FY2015
"In response to the increasing demand for infant formula and whole milk powder products, the Company has been active in securing new long term milk supply contracts in New Zealand, with annual milk supply doubling to over 100 million litres."
The revenue for China and Other Asia for FY2015 was $4.044m. The incremental revenue in Australasia
$149.017m - $106.866m = $42.151m
Let's assume all of that incremental revenue is representative of the 'Daigu' A2 milk powder imported into China. So total Chinese revenue for FY2015 was:
$42.151m + $4.044m = $46.195m
p20 of the AR2017 says A2 Platinum sales rose 78% over FY2017. In dollar terms, this was a rise from $214,376m to $394.026m. There was no equivalent product sales breakdown in AR2016. However if you look at the 'Portfolio Presentation' given to investors on 11th - 12th September, 'Portfolio Composition' slide on p20, if drawn to scale looks like a revenue gain of about 500% between FY2015 and FY2016.
So total Revenue gain from FY2015 to FY2017 looks like it has gone up: 5 x 1.78 = 890%.
$46.195m x 8.9 = $411m, within the ballpark of Synlait's $394m quoted sales figures.
Meanwhile the milk under contract via Synlait NZ has gone up from 100 million litres at EOFY2015 to 225 million litres at EOFY2018. We also know that this 225 million litres represents 65% of all certified A2 milk produced globally. One thing we do not know is how much of the A2 milk from Synlait in NZ, processed or not, is supplied to the NZ market. However, I would assume it is not a high percentage of total A2 Synlait output:
The question I would pose to shareholders is this.
1/ If the total A2 raw product supply of milk to Synlait in NZ has gone up by 225% over two years AND
2/ This 225 million litres represents 65% of world certified supply AND
3/ During this period A2 Platinum production out of NZ has grown by 890% (i.e. the increase in formula production is growing four times faster than the increase in raw material supply).
4/ How much raw A2 milk we be needed to increase A2 platinum production my another factor of 3 above our baseline 2015 figure?
The answer is I believe a lot more milk than the total certified global production of A2 milk right now. Even if you could get away with 'only' increasing the herd by 100% within three years, that is still three times faster than the maximum rate of herd breeding rate that the best genetic testing and herd culling is able to achieve.
In summary there is nothing wrong with the A2 business plan and every reason to believe it will be achieved. But the absurd growth implied by investor bid PE levels will not be achieved. IMO the fair value for A2 milk shares today is something less than $3 on biologically possible business prospects.
SNOOPY