ATM - A2 Milk Corporation Limited

[hardt]

Recent punters will be hoping that 4 traders mean target price of $6.14 is wrong, but then again maybe it isn't.

Needless to say price targets are 6-12 month outlooks on fair value, people take more than just the next reporting period into consideration when buying a stock now don't they.

Brokers who get it wrong the first time tend to carry on distorting success as a bubble and remain bearish throughout, until a new analyst takes over the coverage.

Pretty sure Craigs mentioned in an NBR article a few weeks back our market on a forward PE of just over 20 and average earnings growth this year was 8% so PEG of 2.5.

I think you make a good point that for the growth expected the shares are not expensive especially when you start looking at the PEG of stocks like FPH and RYM to name just two other NZX10 sized companies with consistent growth, albeit at a much, much lower rate.

It would not surprise me to see this at around $4-$5 in 4-5 years time, (after a 5:1 share split).

Yep, PEG is what I have been using to value the likes of SML and ATM relative to some other options... globally it is discounted growth.

[Beagle]

Recent punters will be hoping that 4 traders mean target price of $6.14 is wrong, but then again maybe it isn't.

I think you'll find those forecasts are based on data that's many months out of date. Analysts often wait for official company updates before revising their valuations so you can expect major revisions next month after the company annual meeting and official market update.

[kiora]

If the market remains relatively bullish on the backdrop of A2 and infant formula in China, what kind of price will people pay for growth?

Very few stocks have a PEG below 1 and I highly doubt A2 milk will be one of them.

Even with earnings growth significantly tapering off over the next 5 years it still looks good to me.

Most stocks I hold sit around 1.2-2 PEG , I would love to find the NZX average to compare.

ATM.NZX	2017	2018	2019	2020
EARNINGS PER SHARE	12.29	21.18	27.99	34.93
FORWARD PER AT 850	40.13	30.37	24.33	19.54
SP AT 30 x FORWARD PE	635	840	1048	1305
PEG RATIO AT 30 x EARNINGS	0.41	0.93	1.21	1.22
SP AT 40 x FORWARD PE	847	1120	1397	1740
PEG RATIO AT 40 x EARNINGS	0.55	1.24	1.61	1.63
FORWARD EARNINGS GROWTH	72.35%	32.14%	24.81%	24.53%

This is assuming their is enough A 2 milk supply but it is dependent on biological systems.How is ATM placed on milk supply?
' a pure A2 herd will never be achieved. In testing situations, A2 achievement of herd purity typically takes between four and fifteen years depending on specific strategies and herd parameter"
https://researcharchive.lincoln.ac.n...5640?show=full

[hardt]

This is assuming their is enough A 2 milk supply but it is dependent on biological systems.How is ATM placed on milk supply?
' a pure A2 herd will never be achieved. In testing situations, A2 achievement of herd purity typically takes between four and fifteen years depending on specific strategies and herd parameter"
https://researcharchive.lincoln.ac.n...5640?show=full

Synlait milk is responsible for the supply of the raw materials used in the Infant formula, not once have we heard anything about future prospects of limited supply.

The idea of doubling the A2 certified farms is usurped by the growth of current A2 certified dairy farms herd size as they have the breeding stock available.

Does anyone really think A2 and SML have not considered the supply of raw materials in their 10 year business plan?

This idea of the supply of A2 milk not keeping up with demand is a very weak bear case to put forward and belongs on hotcopper...


Ex Synlait AR:

Further premiums are paid for a2 Milk™ and Grass Fed™ programmes.
Synlait has sufficient milk supply for the foreseeable future and is not seeking further farmer contracts for our Dunsandel site.

We now have 60 farms supplying 225 million litres per year of a2 milk™. These farms produce 65% of certified a2 milk™ produced globally.
This milk is used in the manufacture of The a2 Milk Company’s infant formula, whole milk powder and skim milk powder products for sale in consumer packs.

[Snoopy]

Synlait milk is responsible for the supply of the raw materials used in the Infant formula, not once have we heard anything about future prospects of limited supply.

The idea of doubling the A2 certified farms is usurped by the growth of current A2 certified dairy farms herd size as they have the breeding stock available.

Does anyone really think A2 and SML have not considered the supply of raw materials in their 10 year business plan?

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?"

This idea of the supply of A2 milk not keeping up with demand is a very weak bear case to put forward and belongs on hotcopper...

Ex Synlait AR:

Further premiums are paid for a2 Milk™ and Grass Fed™ programmes.
Synlait has sufficient milk supply for the foreseeable future and is not seeking further farmer contracts for our Dunsandel site.

We now have 60 farms supplying 225 million litres per year of a2 milk™. These farms produce 65% of certified a2 milk™ produced globally.
This milk is used in the manufacture of The a2 Milk Company’s infant formula, whole milk powder and skim milk powder products for sale in consumer packs.

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

[Snow Leopard]

Q: How much milk does NZ produce in a year?
A: Approx 20,000 million litres.

Q: How much of that milk is 'pure' A2 (i.e. the cow is homogeneous A2)?
A: Approx 30% or 6,000 million litres.

Q: How much of that 6,000 million litres is actually from certified A2 cows in A2 only herds?
A: Don't know, but lets us say 5% or 300 million litres.

Q: If the demand is there and the economics work out, like if there is a sufficient premium for A2 over non-A2, would it be possible to screen the existing herds for A2 cows and do a little cattle shuffling to increase the size of certified A2 cows in A2 only herds?
A: Absolutely.

Q: By how much?
A: Lots.

Q: Will that Satisfy Snoopy?
A: We will have to wait and see.

Best Wishes
Paper Tiger

[couta1]

Many punters buying in at current prices for FOMO, yet they have already missed out on a 100% plus gain over the last 3 months. Where will the SP be 3 months from now? no one knows but it won't be double the current price, that's for sure. My FOGS (Fear of getting skunked) is hugely greater than any FOMO I might entertain for a few seconds. Remember don't buy any share you wouldn't be happy holding if the market shut down for 10 years,all my current stocks fit that criteria.

[kizame]

Many punters buying in at current prices for FOMO, yet they have already missed out on a 100% plus gain over the last 3 months. Where will the SP be 3 months from now? no one knows but it won't be double the current price, that's for sure. My FOGS (Fear of getting skunked) is hugely greater than any FOMO I might entertain for a few seconds. Remember don't buy any share you wouldn't be happy holding if the market shut down for 10 years,all my current stocks fit that criteria.

Sorry, but if the market shut down for ten years,how would you be any worse off owning ATM than your other picks,in fact when the market reopened in ten yrs time,I would say you would be pretty pleased with the stock price catch up.
But i see what you are trying to say,if the market actually shut down for ten yrs I would rather hold something with some real growth potential such as ATM.

[King1212]

That why...I believe SML is better position compared with ATM n better value. As SML not only contracted to ATM but other 2 big players...New Hope Nutritional and Munchkin USA

[see weed]

Yes, just bought 10K @ 8.10 24/10 ...just following your jovial self.- averaging up on a good story but then I got on and off the train frequently to stretch my legs.

Same here. Sold some Friday, and bought 10,000 back today.