ATM - A2 Milk Corporation Limited

[+++++]

Didn't check Fri afternoon. Ouch. LOL. Oh well, life continues. Hopefully sunny Xmas Day.

[Beagle]

Stock should be trading on a PE of 18 - $6.84

Third downgrade would see it down to that level.

My gut instinct tells me that's now a reasonable PE going forward, (I think once a new floor in eps is found this year future growth is going to be much slower and much more expensive to achieve) but we will have to wait and see what eps is for the year. With the speed and severity of the recent downgrades something much lower than 38 cents is quite possible, even probable.

This is flawed logic. If ATM were going to take all their cash and give you a bumper special dividend then you would be on the right track. But ATM need the cash for their second tilt at the United States market, which is loss making. If they give you the cash, then ATM will not be able to develop the US and other Asian markets and growth will slow. ATM trades on a very high PE ratio (and yes so does much of the rest of the market but that is beside the point). Without growth the share price will collapse. (Some will say this process has already started.).

The whole idea that ATM has 'a lot of cash' is not true anyway from an investor perspective. Yes there is a lot in dollar terms But having to pay $11 for a share to buy $1.15 worth of cash is a very expensive way to obtain 'cash'.

Equally absurd is the suggestion that shareholders should ignore losses in the USA when valuing the company. It is true that shareholders would make more money today if the US operation was shut down. But guess what? A core part of future growth is to expand in the US. If such a growth plan did not exists the PE ratio would be trimmed again, as it became clear that ATM was a one market wonder for infant formula. The cash is needed "in house" to develop the business. Only when ATM starts to pay a dividend might a shareholder consider even some of that cash to be surplus to requirements, and so to be valued separately.

SNOOPY

Excellent high caliber post.

Agree Balance. Frankly, the entire management/governance around these matters have been quite poor, bordering on negligent. Disappointing, and I'm not even a shareholder. I smell a rat....and as we know, if it smells like a rat, sounds like a rat and looks like a rat....

Going into a trading halt was unnecessary, and a little akin to a possum in headlights. Perhaps they were trying to "buy themselves some time" so they could set/control the narrative?

Technicals are still not looking healthy on the chart. But there may be a little support around $10. Interestingly we are now pretty much around the 50% retracement level off the FTH, but with yesterdays gap down, I wouldn't recommend trying to catch a falling knife right here & now. Seeing a number with an 8 in front is not inconceivable!

Agree about the rat comment 100%. My nose for corporate creative B.S. has been giving a reading off the charts for quite some time hence the persistent loud warning barks.

On a very serious note, reading through all the postings in the last 3 days, I believe imo that there are several pertinent observations I would make about the downgrade announcement yesterday:

1. Directors and management obviously do not have a good handle of what's happening with sales & stocks in the market - been too easy in the last few years with demand exceeding supply. Management information system is deficient and frontline staff have been asleep on the job.

This is a very serious problem & issue for a company which is attempting to go global. The fact that we have had 2 shocking downgrades within the space of 3 months is testimony to that fact.

2. Daigou sales are very significant (hundreds of millions of dollars) and ATM is extremely vulnerable to any disruption to that sales channel. With the stroke of a pen, the China government can wipe out that channel.

3. Related to 1 and 2, have there been channel & brand switch? So the decline in sales is really the cannibalization of sales from daigou channel to the direct sales channels in China? This could explain why sales growth to China are now going backwards overall.

4. Management selling in the quantum and the timing begs the question if there has been skulduggery in the way they presented sales forecasts in the last 3 months. Revert back to 1 above if there is no skulduggery. Either way, there is a very serious issue which the company needs to come clean on.

I would certainly stay clear of investing in ATM until answers are forthcoming on the above points.

Agree 100%. Its a real shame Geoff Babbage is ending his career on this very sour note. I can't help wondering if the game is up with ATM with the strong growth in competition ?
Whatever happened to the valuable IP and patents that ATM used to talk about so often in years gone by ?

I think the shares are a great short at $11 and are headed in the short term considerably lower but I'm not going there in terms of shorting them.

For what its worth folks I know the Kingfish group (Barramundi and Marlin included) do regular company visits and are talking to the management of the firms they invest in on a regular basis. This is one of the ways they have consistently achieved outperformance in recent years.

[alokdhir]

You probably should disclose your shorts - they seem to impede on your sight :

So - if a sinkhole appears under our newly build motorway and I take the old road into town instead of queuing up on the motorway, does this mean that I am canabalising the motorway?

That's what you said about direct sales canabalising Daigou .... it appears that your try to throw as many negative expressions around as you can. Instilling fear might be good for a shorters agenda, but it is not really helpful in any sensible discussion.

A2 had a huge sales boost after the start of the pandemic ... and given that babys are unlikely to have consumed significantly more milk during the pandemic than before ... it is quite likely that consumers just filled their cupboards (hey, other people bought toilet paper to last for the next 2 decades) - and find now that they still have some tins they want to use before buying new stuff, which well might explain a temporary drop in sales.

Not sure how any MIS system would be able to determine whether a tin of A2 milk sold in a Sydney supermarket gets immediately consumed, gets put into the cupboard as emergency ration for the next lock down or is sent in a parcel to China. I see how it can be difficult to predict short term product demand and product flow. Don't you?

Do you have any long term indications that Chinese parents are moving on from buying A2 product? If yes - what are they?

I agree with u that his is shorter's perspective ...so he highlights negatives more ...moreover its easy to kick a person when he is down ...

What worried me more after reading both downgrade communications ...now they stating that covid impacted Daigou channel decimation is leading to CBEC slowdown also ...how that happens without brand loyalties being shifted or more A2 alternatives available or in reality the a2 brand not as strong as we think it to be ...after all milk is a commodity only ...whats special about A2 milk from ATM company if others also offer A2 protein only milk etc

Also they said other products sales also being effected not only IF in China ....this also they are attributing to Daigou vanishing thus publicity associated with it vanishing which provided them with free grass root level exposure to chinese nook and corner as all WeChat sellers put posts on their account about things they can daigou in ...these posts which show ATM products and its benefits to all friends of that WeChat seller back home ...( All are very well connected back home ..reason they become WeChat sellers )

Think brand loyalty of Apple phones ...people wait to get it ...they dont switch to other easily available brand doing the same stuff etc ...A2 milk seems to become more commodity then speciality product of ATM with so many A2 options available to chinese people ...maybe its exposing the lack of strength of ATM's brand value

Yes the market is so huge that sales can still grow ...but growth rate and margins can be issue going forward ...IMHO

[Gregnz]

Dont forget the New Zealand component with brand loyalty or switching to other A2 brands. Many people who bought A2 did so because it was manufactured in NZ, and this is something that locally produced Chinese brands can never match.

[winner69]

........

Maybe, just maybe Jayne should have been allowed to stay on?

Agree ...just because the Board weren’t prepared to change was no reason to sack her

And bring Babidge back was a big big mistake (said so at the time but most revered him)

Chairman Hearn seems to have been a non-event over the last year

Hope new guy is good ....else A2 will never catch up on the year they they lacked leadership and failed to tackle new challenges.

[Beagle]

I predict the cost of achieving growth and the level of same going forward is going to be considerably more challenging than in the past. Geoff Babbage definitely looking past his prime at the ATM annual shareholder meeting https://www.nzherald.co.nz/business/...+December+2020
Maybe both getting Jayne on board and bringing him back was a mistake ?

One more downgrade to come, possibly 2 before the end of FY21. I suspect they will only do $1.3b turnover in FY21 and gross margin at the low end of expected range. My estimate for FY21 is $250m net profit after tax = 33.6 cps. Choose your PE but I would not pay more than 18. Fair value in my opinion is ~ $6.

[Gregnz]

I predict the cost of achieving growth and the level of same going forward is going to be considerably more challenging than in the past. Geoff Babbage definitely looking past his prime at the ATM annual shareholder meeting https://www.nzherald.co.nz/business/...+December+2020
Maybe both getting Jayne on board and bringing him back was a mistake ?

I suspect they will only do $1.3b turnover in FY21 and gross margin at the low end of expected range. My estimate for FY21 is $250m net profit after tax = 33.6 cps.
Choose your PE but I would not pay more than 18. Fair value in my opinion is ~ $6.

Each to their own I guess, but few companies on the NZX with a share price of $6 and generating a net profit of $250m after tax.

[alokdhir]

I predict the cost of achieving growth and the level of same going forward is going to be considerably more challenging than in the past. Geoff Babbage definitely looking past his prime at the ATM annual shareholder meeting https://www.nzherald.co.nz/business/...+December+2020
Maybe both getting Jayne on board and bringing him back was a mistake ?

I suspect they will only do $1.3b turnover in FY21 and gross margin at the low end of expected range. My estimate for FY21 is $250m net profit after tax = 33.6 cps.
Choose your PE but I would not pay more than 18. Fair value in my opinion is ~ $6.

Add $ 3 for all other assets it has like cash , brand , NZ product etc etc ...So my FV is $ 8-9 max under present circumstances .

[Gregnz]

Gosh, all things considered, I wouldn't want to be invested in FPH, with a P/E of 48+ , full year revenue of only $1.26b, and a after tax profit of only $287m. Yet people happy to pay $34 per share. or Ryman for that matter with a P/E of 25+, generating profits of only $242m and currently $15+ per share.

[Beagle]

Add $ 3 for all other assets it has like cash , brand , NZ product etc etc ...So my FV is $ 8-9 max under present circumstances .

As Snoopy has observed, that cash is required to fund future growth, once a new low base is established in FY21. Without it and the future growth the cash will be used to generate the shares are not worth a PE of 18 so my view is adding back cash on hand is inappropriate. Likewise the brand value is what drives hopefully some modest growth going forward and therefore I would argue is already encapsulated in the metrics I have chosen.

I know $6 seems radically low but I have always been happy to sail my own race and use my own nose to find sensible value.