ATM - A2 Milk Corporation Limited

[couta1]

Hey Snoopy, what's your valuation of these shares currently ? I remember when they were around $2.50, you said there was no little upside for holders, now they are around $6, that's a massive gain.

[BlackPeter]

You left out the key questions. Synlait produces infant formula for other customers , not just A2. The real questions are:

1/ How much of Synlait's increased infant formula production capacity is contractually available to A2 Milk Ltd?
2/ How much increased raw A2 milk supply will be available to process? If the raw product is not available, it doesn't matter what the increased capacity of the processor is.

SNOOPY

I recently asked these both questions to one of Synlait Senior Managers (as part of a factory tour).

Answer to 1: I may well ask, but he is not allowed to answer (funny ideas with commercial sensitivity);

Answer to 2: Lots of A2 herds (and milk) available to them - they currently put a lot of A2 milk into the standard supply .... but no - he didn't specify "a lot" (I asked for percentages ...).

[sb9]

You left out the key questions. Synlait produces infant formula for other customers , not just A2. The real questions are:

1/ How much of Synlait's increased infant formula production capacity is contractually available to A2 Milk Ltd?
2/ How much increased raw A2 milk supply will be available to process? If the raw product is not available, it doesn't matter what the increased capacity of the processor is.

SNOOPY

Unfortunately the breakdown of product mix isn't readily available from published records.

However, I would say its at least >80% for A2 Milk if not more.

You only have to look across ditch about stories and articles relating to A2 IF shortage right across all super market chains and chemist warehouse. With that in perspective one can only imagine the extra capacity mostly going to satiate A2 IF demand.

That's my take anyway...

[sb9]

Sorry forgot another bit of information to add...the strategic partnership agreement of 5 years between Synlait and A2 milk recently and A2's investment in Synlait shares goes a long way in explaining how close they work together...

[Nasi Goreng]

A few months ago I suggested SML could get to $10 within 5 years. I think my estimate may be a bit conservative now. Lots of opportunities for Synlait and with low debt and growth agenda, they can continue to grow and become NZs version of a true value add dairy manufacturer.

Im happy with 11% growth for a consolidation year. Wonder when they may think about divvies, 3-5 years maybe???

[BlackPeter]

Unfortunately the breakdown of product mix isn't readily available from published records.

However, I would say its at least >80% for A2 Milk if not more.

You only have to look across ditch about stories and articles relating to A2 IF shortage right across all super market chains and chemist warehouse. With that in perspective one can only imagine the extra capacity mostly going to satiate A2 IF demand.

That's my take anyway...

Would be interested on what assumptions you base your >80% for A2. It certainly is not based on volume or revenue

Most of their product (per volume) leaves their factory in 25kg paper bags. None of them is labelled "A2"

The last time I visited (admittedly in winter) couldn't I see any truck delivering A2 milk ... despite 4 or 5 trucks being unloaded.

As well - if you look into the SML report - they say (page 75) "Revenues of approximately 48% (2016: 58%) are derived from the top three external customers". Obviously - A2 will be one of these external customers, but if they all three achieve only 48%, Than A2 milk can't have 80%.

I agree however that A2 will have a significant impact on their margin: A2 formula is (one of) their high margin products and the canning line looked pretty busy both times I visited (with A2 cans being filled). However, I very much doubt that A2 contributes >80% to their margin - in that case you would wonder why they bother with the majority of their other products making less than 20%? What would Fonterra live of (they don't have A2)?

[sb9]

Would be interested on what assumptions you base your >80% for A2. It certainly is not based on volume or revenue

Most of their product (per volume) leaves their factory in 25kg paper bags. None of them is labelled "A2"

The last time I visited (admittedly in winter) couldn't I see any truck delivering A2 milk ... despite 4 or 5 trucks being unloaded.

As well - if you look into the SML report - they say (page 75) "Revenues of approximately 48% (2016: 58%) are derived from the top three external customers". Obviously - A2 will be one of these external customers, but if they all three achieve only 48%, Than A2 milk can't have 80%.

I agree however that A2 will have a significant impact on their margin: A2 formula is (one of) their high margin products and the canning line looked pretty busy both times I visited (with A2 cans being filled). However, I very much doubt that A2 contributes >80% to their margin - in that case you would wonder why they bother with the majority of their other products making less than 20%? What would Fonterra live of (they don't have A2)?

My assumption was more a guestimate, taking into account what's being put on slide 22 of the presentation.

[Snoopy]

Hey Snoopy, what's your valuation of these shares currently ? I remember when they were around $2.50, you said there was no little upside for holders, now they are around $6, that's a massive gain.

I got it wrong didn't I? My scepticism was because of my doubts about being able to repeat the success of China/Australia (I think you have to regard that as one market for baby formula, given that such a high proportion of Australian A2 baby formula sales end up in China) in the USA and the UK. I still hold those doubts. But guess what? Maybe it doesn't matter?

China is such a huge market that perhaps the 'exponential growth' implied by the A2 share price growth can be achieved in China alone? A2's marketing seems second to none. I really doubt that all the buyers of A2 are getting the benefit they think they are getting. But some obviously are. And if the others think they are, there is no reason that A2 won't continue to do well.

The problem with valuing something like ATM is that I like to think what benchmark I can compare it to? I don't think I know the China market well enough or the grocery market well enough to make an educated guess about choosing a benchmark. My valuation is: I don't know! All I know is the current share price incorporates a lot of hope and hype and I can't judge how much of that is justified. ATM is off my investment radar for that reason. I don't chase share price charts.

SNOOPY

[sb9]

Sourced from Hot copper...

https://www.fnarena.com/index.php/20...ed-for-growth/

Key highlight being...in relation to Synlait results and contribution of A2 to their sales and margin.

"Any new investment will be conditional on further growth in demand in advance of current projections but for the Bell Potter this highlights the optimism management has in the business. Furthermore, the broker envisages internalisation of the packaging of the a2 Milk adult nutrition product will be a potential profit driver in the second half. The broker estimates a2 Milk accounted for in excess of 80% of the company's consumer-packaged volumes and in excess of 30% of gross profit in FY17."

[Tee]

Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
John Templeton

I'll say that ATM is in the mature stage, and won't buy as the window of opportunity had long gone. It will appreciate as all market darlings do, but not forever.