ATM - A2 Milk Corporation Limited

[Trigger]

Put another way, unless A2 is successful in 10 more markets the size of Australasia, we can expect the value of A2 shares in the long term to decrease.

Or one market ten times the size of Australia, though that would likely be a more efficient form of expansion, albeit riskier. Or other permutations of same.

Looking forward to see what guidance is next offered by the company in regard to their developing markets.

Good analysis thanks Snoopy.

Trigger

[Snoopy]

Snoops me old mate - how about this

Guidance F16 is $39m ebitda, say $25m NPAT. Essentially this is Aus/Asia - yes?

So Aus/Asia business at your 20 PE is $500m, 75 cents/share

Winner, did you see the explanatory note contained on page 99 of AR2015, regarding the Segment allocation of profits?

"•The Australia and New Zealand segment receives external revenue from milk, cream and infant formula sales, and royalty and licence fee income."

(my bold: I note that other regions do not receive royalty and licence fees!)

"•The China and other Asia segment receives external revenue from milk and infant formula sales. This segment is responsible for the infant formula supply chain to all markets."

Does this not point to both the comparative segmented sales in 'Australasia' and 'China and other Asia' being overinflated? Infant formula sales in particular are all put through the China/Asia division. So any growth in other markets will have to exclude this high margin fast growing product line! That makes growth significantly harder in the emerging UK and USA markets.

UK/America going to be gangbusters i'm told - so double the 75 cents and you get a total business valuation of $1.50

Maybe current price not too far off a reasonable valuation.

Believe the story.

Not saying it isn't possible. Just that an awful lot of water that has yet to flow under the bridge has already been banked by avaracious shareholders.

SNOOPY

[Leftfield]

"•The Australia and New Zealand segment receives external revenue from milk, cream and infant formula sales, and royalty and licence fee income."

(my bold: I note that other regions do not receive royalty and licence fees!)

"•The China and other Asia segment receives external revenue from milk and infant formula sales. This segment is responsible for the infant formula supply chain to all markets."

SNOOPY

It is relatively common for other 'International Companies' to shift charges and costs from country to country to gain maximum commercial, tax and exchange advantages.

Early stages for ATM, and v hard to draw regional comparisons as it seems to be growing and learning v fast.

[NT001]

not[/I] invest.

I don't know where Snoopy gets his information on A2MC bosses selling their shares and the reasons for their doing so. I haven't seen much to back this up apart from notice by one individual, the CEO, that he has sold a very minor part of his holding with no details as to the reason. It seems to me there are a few cynics around who believe they can mind-read.

As to the future of A2 shares, I don't pretend to understand TA or FA, but have some understanding (which very few investors seem to) of the difference between A2 and its competition, and the underlying science. A lot of market experience to date is almost irrelevant because the company has been prohibited from properly explaining the benefits of A2, or to be more precise, the potential health risks of its competition - standard milk which contains A1 protein.

This will change as more scientific findings emerge. For example, results of a recent clinical trial carried out in China using s substantial cohort of human subjects are due for publication soon and there is little doubt they will show conclusively that a significant proportion of consumers who suffer digestive and associated medical ill-effects from drinking milk containing the A1 protein can drink A2 milk without such problems. An earlier preliminary trial conducted at Curtin University was scoffed at by critics on the grounds that it was too small-scale to be conclusive. If my guess is correct, the Chinese trial will carry much greater weight because of its larger scale and because the subjects are Chinese, who are a huge market and appear to have more difficulty with cows milk than Europeans.

This is just one step in the process of backing up the A2 (or anti-A1) case scientifically. Scientists round the world are increasingly publishing independent clinical results indicating other risks associated with A1 dairy (eg in relation to autism and sudden infant death syndrome). As these become more corroborated and better-known, they will create an expanded demand for A1-free dairy products. This won't be an overnight process, and A2 investors should ideally be prepared for the long haul, but it is happening even though it is not measurable in terms of TA.

A2's success in Australia has been largely due to shoppers discovering for themselves that they and their kids have fewer health problems when they switch to A2. It's largely due to word of mouth, not health claims by the company, whereas in India, one of the world's biggest dairy markets, where there is vigorous public discussion of this issue with frequent articles in the media quoting scientists on technical details, there is growing pressure on the government to ban the sale of A1 milk and the breeding of cows that are not pure A2. In countries like Australia and NZ, the US, UK and Europe consumer awareness will also grow despite attempts by the likes of Fonterra and Dairy Australia to fight back.

Some criticise the use of TA to calculate the SP value of a developing company, but I believe an even greater difficulty is to estimate the future science, politics and consumer perception of A1-A2.

[kura]

Complete change of subject, I confess to playing Warcraft (WOW ) a woman in my guild is from USA, she described the state she is from as the "Dairy Capitol of the World" Don't ask me what state it was, all I can say is that borders on Canada.
She had never heard of this little country called NZ & was astounded when I told her that we were big in Dairy.

Disc: She was a mean PVP player, would hate to go up against her.

[Snoopy]

It is relatively common for other 'International Companies' to shift charges and costs from country to country to gain maximum commercial, tax and exchange advantages.

Early stages for ATM, and v hard to draw regional comparisons as it seems to be growing and learning v fast.

I am not criticising ATM for incorporating the 'infant formula supply chain ' globally into the Asia/China division. We have to remember that ATM is still a realtively small company in staff and operational terms. It wouldn't make sense to separate out all the supply chain quality control and manufacturing functions between all the even smaller divisions of ATM. China seems pretty strict on quality control of infant formula. So meeting Chinese standards for import is probably good enough for other global markets. It all makes sense.

My point was more mathematical. If all the manufacturing and quality control functions for infant formula are done through Asia/China, even on an arms length basis, this means less (in this case none) of those functions will be incorporated within the 'A2 UK' and 'A2 USA' reporting segments.

By the same token 'A2 UK' and 'A2 USA' will be paying royalties to the NZ parent, while 'A2 Australasia' effectively pays royalties to itself.

These two indepoendent facts diminish the size of 'A2 UK' and 'A2 USA' going forwards. On a segment basis they have to run harder to achieve the same level of profitability that 'A2 Australasia' has.

Taken on an overall company view, where costs and production functions are allocated doesn't matter. But looked at on a divisional basis, and A2 are quite clear that it is the Australasiian division that is driving global growth, it does matter. 'A2 UK' and 'A2 USA' have been structured to be fundamentally less profitable. That probably saves some tax for ATM going forwards (NZ company tax rates less than UK and USA?). But it also means that divisional profitability, both in the UK and the USA, is likely to be less than some shareholders expect given their potential market growth.

SNOOPY

[Leftfield]

Taken on an overall company view, where costs and production functions are allocated doesn't matter. But looked at on a divisional basis, and A2 are quite clear that it is the Australasiian division that is driving global growth, it does matter. 'A2 UK' and 'A2 USA' have been structured to be fundamentally less profitable. That probably saves some tax for ATM going forwards (NZ company tax rates less than UK and USA?). But it also means that divisional profitability, both in the UK and the USA, is likely to be less than some shareholders expect given their potential market growth.

SNOOPY

Thanks Snoopy - I understand your point of view and agree.

I also point out that it is still very early stages in this company, and it would be nice in the future to see more transparency to allow us to make better regional comparisons.

[777]

Complete change of subject, I confess to playing Warcraft (WOW ) a woman in my guild is from USA, she described the state she is from as the "Dairy Capitol of the World" Don't ask me what state it was, all I can say is that borders on Canada.
She had never heard of this little country called NZ & was astounded when I told her that we were big in Dairy.

Disc: She was a mean PVP player, would hate to go up against her.

Probably Wisconsin.

[tomblu]

2015: NZ had just over 5,000,000 dairy cows, Wisconsin had 1,271,000

[dobby41]

Complete change of subject, I confess to playing Warcraft (WOW ) a woman in my guild is from USA, she described the state she is from as the "Dairy Capitol of the World" Don't ask me what state it was, all I can say is that borders on Canada.
She had never heard of this little country called NZ & was astounded when I told her that we were big in Dairy.

Says more about her world view than anything else.
If the state is the biggest dairy in the US then, by US definitions, it must be the biggest in the world.