ATM - A2 Milk Corporation Limited

[alokdhir]

ATM business model maybe intact and it may come back in 1-2 years time but in reality there is hard work to be done ahead for the company .SP is reflecting that they are in trouble and its future looking at next 6 months of stiff challenges . Yes it can reset itself and reduce its dependence on indirect sales mostly dependent on travel / tourists . CBEC also getting effected and other products and not only IF being effected is not good news at all . Stores sales better and liquid milk better but money spinning business not doing well . 1-2 years process to get it back on track as per me provided management gets things right and get help from conditions improving which actually precipitated this fall and exposed their vulnerability fully .

Secondly ATM management has failed ( 3/10 ) on corporate governance standards . In times like this disclosures and almost running commentary of company functioning including what's changing and how they proposing to counter it should be provided as regular updates .

Two times they changed their outlook dramatically within very short period of reassuring ...Not looking good for them at all !!

SP will drift lower till people get more confident of traction coming back in some way . All slides down stops before trying to move up .

Not business growth dynamics at the moment but it becoming Takeover target will cushion SP . Many will take a punt at its TO chances ...SP is very close to being called very attractive for that to happen if someone sees value and usefulness of doing that !

As they are mainly China business company so most likely it can be from China and from someone looking to get in China or add premium products to their existing China business like big Chinese dairy distributors etc

[BlackPeter]

I was a believer! Trust me. Originally brought at $19. Doubled down at $15. Then again at $14. But the writing is on the wall for all to see now. I've got a 3yr old so understand once an infant anything (formula, prams, front pack etc) brand falls out of favor, and new (Chinese) brands build traction.. mums talk.. not keen to sit around watching it play out.

I'm now in the other camp and expect another downgrade before the end of the FY.

Not intending to pick on you ... but this post is an excellent example that religion (a believer!) and investment strategies don't match.

Obviously - nobody (including me or you) can predict how the share price will go from here, but blind faith it will recover is as bad and non-sensical than shear fear that the world will end for this company.

So - what do we know?

• A2M is an easily scalable and so far fast growing marketing company for a product consumers want (and some of them need).
• (forward) Revenue CAGR around 40, well yes until the blip they announced for the current year.
• (forward) earnings CAGR around 30, will be less now, but no doubt they will stay profitable even during the blip.
• ongoing expansion into the worlds largest domestic market (the US)
• Very healthy balance sheet (liabilities to assets something like 21%);
• huge cash balance (i.e. war chest);

Yes, the current year clearly will provide a deviation from the growth trend, but trends have a habit of regressing to the mean, don't they? Is this Covid thingy really likely to destroy A2's future growth opportunities in eternity by inconveniencing one of their sales channels if we assume that mankind gets Covid within the next 12 months or so under control and that even A2 managers might be able to think about different sales channels and different markets if they have time to think hard enough?

Of course - balance and winner might be right that management is often too optimistic and reluctant to admit previous errors in judgement (they are ...), which results in the famous adage "down grades come always in threes" (i.e. 2 down, one to come).

Possible, i.e. it might make sense to sell now and buy back cheaper. Could be a sensible strategy for traders, and may or may not work out. Not sure about others, but I find it always easier to identify the peaks and troughs with hindsight ... not so easy during the action :

However - this is clearly not the time to write A2M off for all times ... they are a healthy company with a great story and a great product. If there have been good reasons to buy them 6 months ago, than none of these reasons has changed (but a minor timing issue).

Some famous investor said once there is a time to sell, a time to buy and a time to go fishing. Personally I still need to make up my mind whether for A2 its currently the second or the third, but the time to sell is in my view well passed by ... and panicking is never a good response to share market events.

[alokdhir]

I have them on a forward PE of 28.2 based on eps of 39 cps for FY21 and that assumes there is not another downgrade, (which I do not think is a safe assumption).
Yesterday's share price drop on the face of it seems logical enough, (dropped in line with the forecast drop in current year eps) but no account seems to have been taken by the market yet of whether metrics of that order are still appropriate going forward given reports suggesting Chinese made IF is apparently gaining significantly more traction and predatory pricing practices by Fonterra with their Karicare A2 IF might cause ATM's growth rate to slow going forward. There's also no apparent account with those suggested metrics with the very heightened geopolitical risks that are readily apparent. On top of that I think management's credibility is now at best, "in doubt".

I guess it all comes down to whether one accepts management's explanation that this is a one-off Covid impact affecting the daigou sales or whether there are issues with the brand starting to lose traction with its growth ? I am skeptical that management are being completely transparent on what's happening out there, (for commercially sensitive reasons) and human nature is such one always wants to think the challenges presenting are temporary and the good times will start rolling again soon enough. Hope is a strategy, or is it ?

I remember the days ATM was on a forward PE of 30 and they were growing eps at 30-40%, that was the time to own them in my opinion...that they are still on a very similar metrics when there is now ample evidence growth has dramatically slowed in recent years and obvious headwinds to the business, frankly surprises me.

I would say in my several decades of investing that the old adage that downgrades usually come in three's is correct more than 90% of the time.
I think earnings will get another downgrade and the metrics this company trades on will also get a significant reset.

For what its worth, I never buy shares in a downtrend.

What are your views about it looking attractive as TO target ?

As per u what SP levels will make TO attempt very likely ?

Keeping in view it has almost 1 billion in bank and good 300million NP business with chances of further growth ahead

[Beagle]

What are your views about it looking attractive as TO target ?

As per u what SP levels will make TO attempt very likely ?

Keeping in view it has almost 1 billion in bank and good 300million NP business with chances of further growth ahead

I am sure many will speculate on this but I don't wish too. My very brief thoughts are that for my money If I were theoretically sitting on the board of a major international competitor I'd want to wait and see where the dust settles on this, see what their real net profit is and how badly sales growth has declined. For what its worth I doubt OIO and Commerce commission approval's would be straightforward or a certainty either.

Let me answer you question with some questions:-

Secondly ATM management has failed ( 3/10 ) on corporate governance standards . In times like this disclosures and almost running commentary of company functioning including what's changing and how they proposing to counter it should be provided as regular updates .

Two times they changed their outlook dramatically within very short period of reassuring ...Not looking good for them at all !!

Would that impress you if you were on the board of a competing company looking at possibly taking them over ?
What about them still being on a forward PE of 28 times when their profit is going backwards ? I know raising debt to make takeovers is cheap but why give yourself a hospital pass ?
Is just over $1 per share in cash an especially relevant factor here ?

[whome]

I thought that Fonterra had the rights to market A2 branded products through their well established channels in SE Asia with the exception of China. Fonterra are arrogant enough to think they can ignore an agreement with ‘the little guy’. Could we see litigation here.

[whome]

BTW excellent posts above with good informative opinions.

[alokdhir]

I am sure many will speculate on this but I don't wish too. My very brief thoughts are that for my money If I were theoretically sitting on the board of a major international competitor I'd want to wait and see where the dust settles on this, see what their real net profit is and how badly sales growth has declined. For what its worth I doubt OIO and Commerce commission approval's would be straightforward or a certainty either.

Let me answer you question with a question

Would that impress you if you were on the board of a competing company ?

Thats why I will like to TO the company and replace its top management by my own team . They are in this position because of some poor management and some poor governance standards as they were trying to run away from reality and was doing too much wishful thinking

All professional managers of that level should be knowing that travel like before is not coming back at least for further 12 months ...then on what basis they expected return to normal as soon as December 2020 !!!

[Beagle]

Like a lot of others, I'm not only not pleased but also highly suspicious of what's gone on here. It particularly irks me that management and board were selling large numbers of shares (shares, I might add that were not even bought and paid for by them, but instead were provided by us the shareholders in light of the fantastic levels of management performance)

According to Shane Solly
"The company was clearly expecting a recovery in the daigou and that has not happened through the lack of travel with China. Their mistake was being too optimistic about the daigou demand returning."

What I want to know is what sales numbers were the board and management looking at on 18 November when they reaffirmed revenue guidance for 1H21 at 725 to 775 million. At that point they were stating that there was a non zero possibility that (with just six weeks to run until the end of 1h21) they would achieve revenue of $775 million. Now four weeks later they are saying $670m so a deterioration of $105 million in a month.

Anybody have a guess at what sales number they would have to have had already "in the bank" at 18 November for them to sensibly and rationally think they could get to a total of $775million over the subsequent 6 weeks? I would pick that they would have needed around $595 million if they were doing a simple linear extrapolation from the known to the unknown, they may have some justification for using something slightly more optimistic than a simple linear model but....

Since they are now saying actual outcome will be $670m, I'm thinking it likely they only had around $520m banked at 18 November, so the $2B question is why they thought it reasonable to make such wildly optimistic projections.

An excellent, insightful and searching post. I really wish you would post more often.
I'd like to think with decent computerized monthly accounting systems they would have at the very least known what the four months sales were to 31 October 2020 at the time of making their reassurance on 18/11/20 that sales were still on track for $725m - $775m in the first half and $1,100m for 2H.

Given its likely that 4 months sales data had already been accumulated I think its safe to assume sales in November and indicative sales for December must have seriously tanked for their revised 1H guidance to be well outside the bottom end of the previous range. The doubt as to whether they were blindly optimistic or covering their butts regarding insider selling in the very recent past is very much an open $64,000, (or perhaps $640,000 for some), question in my mind at least.

I think you are right to be highly suspicious of what's gone on here...right from the time of the announcement of the FY20 result and assurances of ongoing strong growth to yesterday. My nose for creative corporate B.S. and insider selling of shares and subsequent butt covering has been giving me a very solid reading for many months now, (hence the sustained loud barking).

I suspect when insiders sold in late August 2020 they knew very well that sales YTD had tanked pretty badly....unfortunately its very hard to make an actionable case out of that alone.

[YoungBull]

Not intending to pick on you ... but this post is an excellent example that religion (a believer!) and investment strategies don't match.

Obviously - nobody (including me or you) can predict how the share price will go from here, but blind faith it will recover is as bad and non-sensical than shear fear that the world will end for this company.

So - what do we know?

• A2M is an easily scalable and so far fast growing marketing company for a product consumers want (and some of them need).
• (forward) Revenue CAGR around 40, well yes until the blip they announced for the current year.
• (forward) earnings CAGR around 30, will be less now, but no doubt they will stay profitable even during the blip.
• ongoing expansion into the worlds largest domestic market (the US)
• Very healthy balance sheet (liabilities to assets something like 21%);
• huge cash balance (i.e. war chest);

Yes, the current year clearly will provide a deviation from the growth trend, but trends have a habit of regressing to the mean, don't they? Is this Covid thingy really likely to destroy A2's future growth opportunities in eternity by inconveniencing one of their sales channels if we assume that mankind gets Covid within the next 12 months or so under control and that even A2 managers might be able to think about different sales channels and different markets if they have time to think hard enough?

Of course - balance and winner might be right that management is often too optimistic and reluctant to admit previous errors in judgement (they are ...), which results in the famous adage "down grades come always in threes" (i.e. 2 down, one to come).

Possible, i.e. it might make sense to sell now and buy back cheaper. Could be a sensible strategy for traders, and may or may not work out. Not sure about others, but I find it always easier to identify the peaks and troughs with hindsight ... not so easy during the action :

However - this is clearly not the time to write A2M off for all times ... they are a healthy company with a great story and a great product. If there have been good reasons to buy them 6 months ago, than none of these reasons has changed (but a minor timing issue).

Some famous investor said once there is a time to sell, a time to buy and a time to go fishing. Personally I still need to make up my mind whether for A2 its currently the second or the third, but the time to sell is in my view well passed by ... and panicking is never a good response to share market events.

I am inclined to agree. Looking at the long term of this stock, has its fundamentals really changed? The largest threat to a changing fundamental as Beagle noted is the local demand and the cheaper alternatives. A switch in consumer behaviour to these may suggest the demand for a premium “clean New Zealand” product has changed, which would be a threat to A2’s economic competitive moat.

In my uneducated and young opinion I think that demand is still there. It is important to remember that the Asian market is huge. Can local and cheap options gain such a significant market share over said huge market to completely lock A2 out of growth options? Is there evidence that these companies have gained a substantially larger market share since you were willing to buy A2 at $21?

The terrible management of the company can leave a bad taste in your mouth, but I believe that may cause investors to perceive the company as a whole as terrible when in reality it still has significant options for growth, a healthy cash balance and a great brand. I personally see this as a chance to buy in at prices that we haven’t been able to get in a long time, so I consider myself very fortunate.

That said I will be watching updates on the Asian consumer behaviour to see if this fundamental has truly changed.

[mondograss]

I just want to say that I’m appreciating the calm, constructive, well reasoned and informative posts on this thread at the moment rather than the hysterical nonsense that’s been the norm up until recently. I’m not a holder right now but I have been and would be again under the right conditions so it’s great to understand others thoughts on where this is traveling.