ATM - A2 Milk Corporation Limited

[Mr Slothbear]

Jeremy, a company can choose its equity structure (the balance between equity and debt) and choose what markets it operates in. The equity structure is what the operational business is built on. The operational business in the case of A2 milk consists of both fresh milk and value added product, of which infant formula is the headline high value add item.

You could 'adjust for cash' if the company had committed you to paying out the cash as a special dividend. But A2 has not done that. AFAIK A2 milk plan to use the cash to develop their markets and supply chain. So if you 'adjust for cash' you are also taking out the future business development that the cash is ear-marked to fund. You may think the company can run on less cash. But the company has chosen to retain a significant cash balance for reasons that you or I may not fully appreciate, and we have to accept that this is how management has chosen to run the business. Put this way and in this circumstance, I hope you can see that 'adjusting for cash' in these circumstances is not an acceptable valuation technique, because the company will be unable to execute their growth strategy if you do this.

Now on the subject of geographic market losses. A2 has pulled out of the U.K. So it would be legitimate and desirable when making an earnings comparison with a previously comparable period and constructing an historical earnings profile to remove any UK market losses from the company earnings history. However, in the USA as I understand it A2 are doubling down on their investment and pushing hard to getting critical mass and earnings momentum. There is the cost of establishing in new markets. All successful growth companies will make a loss when first establishing in a new market. Losses in the establishment phase cannot be avoided. I put it to you that by excluding US market losses in your valuation you are modelling the A2 business in a way that is not real. Doing that will likely lead to poor investment decisions, and relatively poor outcomes for you as a shareholder. If the US was a zombie market that A2 were in the process of withdrawing from then your approach would be fine. But the truth is quite the opposite. The US is still down as a major growth engine for A2 into the future.

SNOOPY

Snoopy, similar to Sees candy, A2 needs Hardly any cash investment to maintain strong growth. Check its ROIC and ROE. All their ‘investment’ via marketing, promotion, store activation etc is wonderfully allowed to be deducted before tax as business costs. Therefore all after tax cash in the bank can be used on projects such as Mataura valley where A2 will extract much higher margins or profits via JV essentially in addition to their big organic growth or alternatively as dividends / buybacks.


so yes I think you can absolutely use cash in their bank as part of valuation or deduct cash on hand per share from the shareprice.

just my 2c

edit; i know you like your free cashflow tables and I firmly believe the vast majority of ATM EPS to be free cashflow ripe for shareholders or reinvestment by the company. They have hardly spent a dime from their warchest the last few years, just look at it grow and yet growth has continued to be stellar. There is all the evidence you need

[aperitif]

"There have been five times when a2 Milk’s share price fell 20% or more. And on two occasions the shares fell by 30% or more. To enjoy the monstrous gains to date shareholders needed to avoid giving in to fear and selling during those troughs of despair. Those shareholders also needed to avoid the temptation to lock in a profit when the shares were up 30%, 100%, 500%, or even 1,000%".

[FONT=Lato, sans-serif][SIZE=4][COLOR=#444444]Loving all these non-holders coming up with reasons to sell, go and do your research FFS. This is an agile company that is always two steps ahead.

[Snoopy]

Snoopy, similar to Sees candy, A2 needs Hardly any cash investment to maintain strong growth. Check its ROIC and ROE.

Mr Slothbear, I take your point about the higher ROE you have the higher ROE you have effectively you get more 'bang for your buck'. Or put another way you get higher growth for a given amount of cash spent compared to a company with lower ROE and lower ROIC. However, saying 'hardly any cash' needs to be spent is a judgement call for management to make. I wouldn't attempt to tell management how much they need to spend. What we do know is that management deem it prudent to hold onto the amount of cash they have. If they didn't need it, the directors have a fiduciary duty to return it to shareholders via a dividend, share buyback or share cancellation. The fact that they haven't done this would suggest that they consider the amount of cash they have it is necessary to keep. They may have specific growth plans that shareholders are currently unaware of that require this cash.

All their ‘investment’ via marketing, promotion, store activation etc is wonderfully allowed to be deducted before tax as business costs. Therefore all after tax cash in the bank can be used on projects such as Mataura valley where A2 will extract much higher margins or profits via JV essentially in addition to their big organic growth or alternatively as dividends / buybacks.

Expenses deductible for business costs are not 'cost free'. In NZ a company must pay 72% of its business deductible expenses in cold hard cash. So you are quite wrong to suggest all cash is free to use on other projects. Putting money into a Mataura Joint Venture processing project is unlikely to earn the company a higher return. But it might improve the security of product supply, which might be a more important medium term goal than dialing up the best short term return. And they definitely need cash to achieve this, so the cash isn't surplus.

If A2 were considering dividends or buybacks then you could deduct the cash earmarked for that off the company operating assets. But they aren't, so you can't.

i know you like your free cashflow tables and I firmly believe the vast majority of ATM EPS to be free cashflow ripe for shareholders or reinvestment by the company. They have hardly spent a dime from their war chest the last few years, just look at it grow and yet growth has continued to be stellar. There is all the evidence you need

The evidence you need that the company needs the cash is that they have retained it. The fact that alternative management could have (say) signed up water tight supply contracts with the likes of Mataura and not bought into the joint venture and so returned that 'investment cash' to shareholders is irrelevant. Because alternative management are not in charge.

SNOOPY

[Snoopy]

Thanks Snoopy, but I was just pointing out where I see value and the fact that A2 milk has a substantial amount of cash to me, makes it more attractive that if the business had no cash and was using debt to fund their growth. It also opens up new opportunities for further acquisitions.

That is all very true Jeremy. But if the cash is returned to you then it is not there for future acquisitions. And if the cash is used for a future acquisition it is not there to return to you. What you are proposing by 'adjusting for for cash' is to 'double count' the cash.

I don't agree that funding all growth with cash is necessarily the most capital efficient way to go either. But no doubt A2 have their own reasons for funding their growth the way they choose to do it.

Aside from all that, even at the curent MC the PE is 34 which in the context of the New Zealand Market and growth rates can hardly be considered expensive?

I am not going to agree or disagree with that. I would want a good measuring stick to make a really good guess at valuing ATM today and this is something I don't claim to have.

SNOOPY

[Waltzing]

15.60 is a big buy if the numbers are in line with growth..

[longy]

It seems nobody is prepared to have a mature conversation about whether this company has matured into a slower growing blue chip company. My time here is obviously wasted.

Hear Hear. Slowing down is due to Covid right? If so could be short live. Other threat of course is the political leaders between Stats, OZ and China are nibbling at each other at the moment. Uncertainty is what I don't like.

[couta1]

Hear Hear. Slowing down is due to Covid right? If so could be short live. Other threat of course is the political leaders between Stats, OZ and China are nibbling at each other at the moment. Uncertainty is what I don't like.

Uncertainty is the only certainty. PS-Remember A2 is a NZ company not an Aussie one.

[couta1]

It seems nobody is prepared to have a mature conversation about whether this company has matured into a slower growing blue chip company. My time here is obviously wasted.

It certainly is, too many staunch visionary holders over here, you'd better find another axe to grind.

[bull....]

should be another good day for a2 today , on the downside

[Leftfield]

Your day attempting to troll this thread has ended pretty pathetically when you are reduced to claiming that something from the Moose is 'well thought through'.

Really?

Interestingly those insto's that own the majority of ATM stock constantly sending out their hyenas for short raids with their BORROWED computer assisted algorithm trading. Taking the largest feast once the tree shake damage is done the goal to "keep increasing that pot-of-gold" All part of the a2 cycle now for years with brokers using low ball valuations or fake news to create doubt among holders as without them they have nothing.

Normally flick a few shares out yearly but this time decided to hold.

"There have been five times when a2 Milk’s share price fell 20% or more. And on two occasions the shares fell by 30% or more. To enjoy the monstrous gains to date shareholders needed to avoid giving in to fear and selling during those troughs of despair. Those shareholders also needed to avoid the temptation to lock in a profit when the shares were up 30%, 100%, 500%, or even 1,000%".

Loving all these non-holders coming up with reasons to sell, go and do your research FFS. This is an agile company that is always two steps ahead.

https://mattjoass.com/2019/09/23/how-to-catch-monsters/

It certainly is, too many staunch visionary holders over here, you'd better find another axe to grind.

........well done folks.