ATM - A2 Milk Corporation Limited

[Leftfield]

Before I give the Buffett perspective, I want to give an update on my $3 valuation.....

......If ATM has a market capitalization of $NZ10 billion and the total size of the infant formula market in China is $NZ10 billion, this implies an expected 100% market share for ATM infant formula is already priced into the share. This assumes a static overall infant formula market in China. No doubt the overall infant formula market in China will grow over time. But this metric does show just what sort of sales growth will be required to justify anything like todays ATM share price.

Always good to have a conservative Buffet/Graham view of ATM, however I'm afraid there are aspects of your thoughts that are just a tab questionable. Examples;

1.) A2m does not have a market cap of $10 Billion. As at last Friday its market cap was $8.2 bill (source ANZ)
2.) A2m is not solely reliant on China or Infant Formula for its Market cap. As 1HFY18, 70% of its sales were from Australia and NZ. 26% of sales were from Asia (i.e. more than just China) and 16% out of USA and UK.
3.) Thus a 100% of Market Share in China is not priced into the current SP as you claim. A2's current share in China is about 5% of the IF market. It may grow to 10% over the next year or two, but no one is expecting 100% IF market share in China.

I could go on, but suffice it to say, DYOR.

[BlackPeter]

Always good to have a conservative Buffet/Graham view of ATM, however I'm afraid there are aspects of your thoughts that are just a tab questionable. Examples;

1.) A2m does not have a market cap of $10 Billion. As at last Friday its market cap was $8.2 mill (source ANZ)
2.) A2m is not solely reliant on China or Infant Formula for its Market cap. As 1HFY18, 70% of its sales were from Australia and NZ. 26% of sales were from Asia (i.e. more than just China) and 16% out of USA and UK.
3.) Thus a 100% of Market Share in China is not priced into the current SP as you claim. A2's current share in China is about 5% of the IF market. It may grow to 10% over the next year or two, but no one is expecting 100% IF market share in China.

I could go on, but suffice it to say, DYOR.

Agree with your point 2 and 3 ... however:

ATM-MC.JPG

$8,249,441,457 (@1130) are *(at least in the English language conventions and rounded equivalent to $8.2b.

Millions have 6 following digits, Billions 9 ;

kind regards,

BlackPeter

[minimoke]

2.) A2m is not solely reliant on China or Infant Formula for its Market cap. As 1HFY18, 70% of its sales were from Australia and NZ. 26% of sales were from Asia (i.e. more than just China) and 16% out of USA and UK.


I could go on, but suffice it to say, DYOR.

And there is of course its not just Infant Formula. Its also about fresh Milk and milk powder. Without even considering A2 Cheese, yoghurt and other dairy products. The "Worried Rich" is a pretty large market.

[Snoopy]

It's all about vision and belief Snoopy, two qualities not easily measured by just crunching numbers, I wonder where Apple would be today if someone didn't exhibit those two qualities. I consider this company considerably derisked as compared to a year ago and therefore are comfortable to hold a good sized portion of my portfolio in it.

Couta, I agree that ATM would not be where it is today without the vision and belief of the sadly departed founders he late Dr Corran McLachlan, and the late Howard Paterson. I also agree that those investors who put up the early investment capital had to be driven by belief and not a quick cash payout. ATM today, and it fact the whole dairy industry in NZ, owes a great debt to these people. If I had been in a position to support the company in its early days I wouldn't have done it. And if everyone had thought like me back then, our country would be so much the poorer today.

However all that was some twenty years ago. Investors who buy into ATM today are not adding any development capital into the company. If the ATM share price halved tomorrow, the progress that ATM is making on the ground in China and elsewhere would carry on unabated, and the company would continue to pile up cash. In recent years it has been CEO Geoff Babbage that has become the bearer of the torch of faith. But Babbage has also been selling down his holding. Does this mean he has 'lost the faith'? Well, he still works for the company and still retains a substantial share parcel. So I would say his belief is intact.

Where I disagree with you is in the use of the word 'all' in your introductory comment.

"It's all about vision and belief."

Twenty years on we now need to see some runs on the board as well. It is time to bank some of that early vision and belief and Babbage has done exactly that for himself. Shareholders today need to keep in mind that you can make up a projected growth figure to justify almost any share price you care to name. At some point the share price has to reflect realistic cashflow projections. And that is the place in the business cycle where ATM sits now.

SNOOPY

[couta1]

Word on the street is that all these shares being picked up off the weak hands over the last while will be used in the upcoming index rebalancing, after that the price should rise due to the end of the big boys games Lol.

[Snoopy]

Always good to have a conservative Buffet/Graham view of ATM,

It is interesting that you have lumped Buffett and Graham together. It is true that Buffett was a student of Graham. But they ended up with very different views on how to assess company value. Graham was all about valuing 'net tangible assets'

At the last full year balance date:

Net Assets' less 'Intangible assets' = $241.482m - $13.281m = $228.201m

$228.201m / 718.238m shares = 32 cps

At the last balance date Ben Graham would consider the true value of ATM to be 32c and he would be looking to buy in at a price significantly less than that!

however I'm afraid there are aspects of your thoughts that are just a tab questionable. Examples;

1.) A2m does not have a market cap of $10 Billion. As at last Friday its market cap was $8.2 bill (source ANZ)

True as of yesterday. But ATM has been valued at $10 billion over the last couple of months.

2.) A2m is not solely reliant on China or Infant Formula for its Market cap. As 1HFY18, 70% of its sales were from Australia and NZ. 26% of sales were from Asia (i.e. more than just China) and 16% out of USA and UK.

Yes, but how much of that Baby Formula ostensibly sold in Australia ends up in China? I think, via the Daigou, the answer is about 80% of it. Heck I think about 60% of the Infant Formula sold in the UK, more than half a world away, also ends up in China!

3.) Thus a 100% of Market Share in China is not priced into the current SP as you claim.

OK I may have used rounding to slightly exaggerate the position to make a point. But I do think that the current ATM share price does reflect about a 75% Chinese Infant Formula market share, which is an order of magnitude above where actual sales are today.

SNOOPY

[Beagle]

Snoopy, you're never going to be able to put a value on ATM looking backwards. Take Xero for example which has never had earnings. Its all about the growth.
Most of the professional analysts have a target price around $14 and are forecasting solid growth in EPS over the years ahead. Yes this company has very strong EPS growth unlike a lot of other growth companies that just grow sales and losses.

[Leftfield]

Word on the street is that all these shares being picked up off the weak hands over the last while will be used in the upcoming index rebalancing, after that the price should rise due to the end of the big boys games Lol.

Yes, a friend of mine was rung by his broker saying (words to this effect), "you've had a good run with your ATM however, it may be overpriced, and perhaps you should consider selling some of your holding."

Was the Broker 'well intentioned'? Was the Broker chasing some 'weak hands?" Interesting times.

[winner69]

Yes, a friend of mine was rung by his broker saying (words to this effect), "you've had a good run with your ATM however, it may be overpriced, and perhaps you should consider selling some of your holding."

Was the Broker 'well intentioned'? Was the Broker chasing some 'weak hands?" Interesting times.

A well intentioned broker .....they don't exist

Hope he told that broker what for in no uncertain terms

Even changing won't make a difference because they are all the same

[Snoopy]

And there is of course its not just Infant Formula. Its also about fresh Milk and milk powder. Without even considering A2 Cheese, yoghurt and other dairy products. The "Worried Rich" is a pretty large market.

See my post 8656 minimoke. 78.4% of revenues in the last half year were from Infant Formula, and I would suggest 95% of profits. There is a limited supply of A2 milk available to ATM and it is up to them to get the best return they can for shareholders. Although the presentations highlight he opportunity in fresh milk, the figures tell a different story. Fresh milk has been sidelined and cheese yogurt and other dairy products are hardly mentioned any more. To all intents and purposes ATM has become an infant formula manufacturer only. And rightly so. This is where the best return on the limited supply of product lies.

It is very likely all of these other A2 markets will be taken over by other A2 suppliers, before ATM itself gets back to them.

SNOOPY