Buffett Test FY2017 1/ Top 3 position in Chosen Market
The ‘A2 milk company’ markets differentiated dairy products focussed solely on the benefits of A1 protein free milk. A2 only milk protein is a naturally occurring milk derivative, which nevertheless must be selected for in cows. Particular business attention is on the Asia Pacific market, of which by far the biggest contributor is China. The most profitable way for A2 to sell their milk has been in baby food formula. In 2015 China made up 1/3 of the world total market of infant formula. We should note that many (probably most) nominally Australian and New Zealand infant formula sales are to Chinese ‘Daigou’ resellers. The international brand that A2 milk use for ‘junior sales’ is ‘A2 Platinum Infant Formula’. Despite the company holding numerous international patents based on beneficial use, my assessment is that it is the ‘A2 brand’ -with all the first mover market presence and all the advertising and store shelf space that it has earned- is the real asset of the company.
For the latest half year 1HY2018, total group revenue was $434.7m of which $341.0m was ‘A2 Platinum’. Given the profit margins for A2 Platinum are significantly higher than fresh milk, and the A2 milk supply is limited, we can assume there is every incentive to develop ‘A2 Platinum’ above other A2 products in the medium term. With ‘A2 Platinum’ making up 78.4% of revenues today, and possibly 95% of company profits, we can get a good understanding of where the A2 company as a whole is going by just focussing on this one product.
A2 milk has only a 4.1% of the Chinese infant formula market, well behind international competitors such as Danone’s Nutrica (approx 8% market share) and Nestle’s Illuma (approx 16% market share). Furthermore I believe that this 4.1% market share is by value, not volume. And ‘A2 Platinum commands a premium price. So A2 isn’t even close to a top three market position by volume. But A2 are focussed clearly on the ‘A1 protein free’ market space. A2 have effectively created their own sub market space for baby formula where they are the clear leader. ‘Johnny come lately s’ to the ‘A1 protein Free’ sub market are Nestle with the Illuma sub brand ‘Illuma Atwo’ and Mengniu (the Chinese dairy giant) with their ‘A1-free Children’s Milk’. Right now A2 are clear market leaders in the market space they choose to occupy.
Conclusion: Pass test
SNOOPY
Buffett Test FY2017 2/ Rising 'eps' Trend (one setback allowed)
My view of the normalised profits for A2 Milk over the last five years is as follows:
FY2013 : [$4.120om + 0.7( $0.824m -$0.121m)] / 617.232m = 0.01cps
FY2014: [$0.010m +0.7($0.597m)] / 633.066m = 0.00cps
FY2015: [-$2.091m +0.7($1.681m-$0.831m)]/ 639.327m = 0.00cps
FY2016: [$30.4m + 0.7($0.753m) ]/ 715.570m = 4.3cps
FY2017: [$90.6m + 0.7($2.435m+$0.265m)] / 718.238m = 12.9cps
Notes:
1/ For FY2013 I have removed $0.824m of strategic review costs.
2/ For FY2015 I have removed the $1.681m worth of ASX listing costs
3/ For FY2017 I have removed $2.435m of intangible asset impairments
4/ For all years I have added back the foreign exchange losses (or removed the foreign exchange gains)
Conclusion: Pass test
SNOOPY
Buffett Test FY2017 3/ ROE > 15% (one exemption allowed)
FY2013 : $4.612m / $59.93m = 7.7%
FY2014: $0.4279m / $58.64m = 0.72%
FY2015: -$1.497m / $58.63m = -2.5%
FY2016: $30.9m / $133.1m = 23.2%
FY2017: $92.5 / $241.5m = 38.3%
The last two years show what is possible. But history before then has tipped the trigger.
Conclusion: Fail Test
SNOOPY
Buffett Test FY2017 4/ Ability to Raise Net Profit Margin
FY2013 : $4.612m / $94.304m = 4.9%
FY2014: $0.4279m / $110.621m = 0.01%
FY2015: -$1.497m / $154.803m = -0.01%
FY2016: $30.9m / $352.502m = 8.8%
FY2017: $92.5 / $549.247m = 16.8%
From almost nothing just three years previous, to an impressive 16.8% at the end of the last financial year? That constitutes some improvement!
Conclusion: Pass Test
SNOOPY