ATM - A2 Milk Corporation Limited

[winner69]

Immediately after the last ATM "death cross" the share price went up from 50c to 96c (+92%). The one prior went from 11c to 68c.

That "death cross" MAC was referring to was in June was around 80 cents......suppose after two previous big rises after a death cross ATM was due to do what often happens after a death cross.

KW said pure genius selling at a 200MA or something .....pure genius not buying at 80 cents in my case

Still watching ....maybe one day it might go up again, unless fundamentals are well and truly stuffed and ATM is really only worth 50 cents

[BFG]

GDT auction up 1.4% overnight.

[MAC]

GDT auction up 1.4% overnight.

Yes, it is good to see prices stabilising after the dizzying heights of the last year or two, very good for ATM to have lower farm gate supply costs going forward, good for the exchange rate too, all good.

There’s possibly only one seller not seeing it, here it is if you are reading.

http://www.nzherald.co.nz/economy/ne...ectid=11342876

Dairy.jpg

[NT001]

Yes, it is good to see prices stabilising after the dizzying heights of the last year or two, very good for ATM to have lower farm gate supply costs going forward, good for the exchange rate too, all good.

MAC, I'm not sure that price movements in the global dairy market and changes in Fonterra's local farmer payout will have much direct impact on A2MC, either here or in Australia. Surely the company wouldn't be buying milk in the open market and at Fonterra's milk rates. It would have to have rather special contracts with its supplying farmers that would insulate them from the risky vagaries of the GDT.

Such contracts would have to compensate farmers for special costs, risks and practical requirements that don't apply to other dairy farmers. I'm not familiar with such details but I imagine they would include:

+building up an A2 herd in the first place;
+testing every cow initially for A2 purity and tagging each one electronically so their identity and A2 status can't ever be in doubt;
+keeping those cows separate from non-A2 stock, which in practice probably means having only A2 cows on the farm, and rigorously ensuring the exclusion of strays from next door;
+milking them in a reliable A2-only milking sheds;
+being subject to continuous milk testing to ensure absolute A2 purity, with the risk that if any truckload turns out to be at all A-1 contaminated, payment gets heavily cut.

It's because of all this stuff that A2 milk costs twice as much in the shops, and I wouldn't expect the retail price or the price paid to A2 farmers would change because of the GDT.

However, I can see how the GDT may affect the ATM share price simply by affecting the overall economy and investment market, and perhaps by giving investors a negative perception of anything to do with dairy.

[MAC]

It’s a worthy discussion NT,

The premium that a2 farmers receive in covering conversion and other costs over a1 farmers is 8 to 10%, ATM have told us that, however the retail premium is typically 50%, hence the potential of the a2 proposition.

I don’t know explicitly if ATM pay-outs to farmers swing as much over time or to the same extent that Fonterra’s pay-outs may do, though one would anticipate that Fonterra, simply because of their size and influence on farm gate prices, very probably do set an underlying market price in NZ, similarly with the large Australian dairy companies.

What does seem to be more certain though is that a2 retail prices have been consistent through both the rise and the fall in farm gate costs.

One can see the effect of high farm gate prices on both Fonterra and Synlait gross margins in the chart below.

ATM gross margins have not been affected, in fact they have risen, I attribute that to increasing efficiencies from an increasing scale of distribution and production including gains made at the Smeaton Grange facility offsetting any effect from the peak in farm gate prices.

If ATM are indeed reducing farm gate pay-outs right now we should see that already really quite nice gross margin pick even up a little further at HY15 reporting time, let’s see.

Gross Margins.jpg

[NT001]

It’s a worthy discussion NT,

The premium that a2 farmers receive in covering conversion and other costs over a1 farmers is 8 to 10%, ATM have told us that, however the retail premium is typically 50%, hence the potential of the a2 proposition.

Thanks, MAC, I wasn't aware of that margin figure. I had seen some discussion by farmers of whether all the bother was worth it.

[Harrie]

The gross margins graph you have posted MAC is interesting. What seems to be clear is that it proves what we already know and that is that A2 is seen to be a premium health product and falling farm gate prices, if anything, provides a benefit to ATM's gross margin.
Makes you wonder why the SP has be slaughtered comparative to FSF. Over the last year FSF have been negative 8% while ATM has been negative 21%. Over the last 6 months FSF have actually improved by 0.80% while ATM has been negative 35%. Admittedly, the SP for ATM probably hit a speculative spike around 6 months ago though. IMHO the speculative move was based on the premise that A2 would take off in the UK and USA the same way as it did in Aussie. The market dynamics over there obviously work quite differently. It took 5 or 6 years to get where it has in Aussie so its not unreasonable to expect that it will be at least similar in the UK and USA

[MAC]

Earlier in the year Milford and others were buying at 90c when analyst consensus price targets were at 88c, analyst consensus price targets are presently at 85c, that’s around 55% above present SP.

One can’t thus fairly say the SP was overvalued at 90c based on that advice, my view is that at 96c ATM was at fair value to marginally undervalued.

Would agree though that entering new markets is just like starting a new business and takes time. ATM did allow for such within their four year 2012 strategic plan.

Their advice is for UK profitability in 2017, around one year late due to Wiseman, they are well ahead of plan in Australia, they are behind on infant formula into China due to Synlait registration, but have opened up a new windfall fresh milk market of similar magnitude, we should anticipate the US to be profitable after the three year funding round is complete, probably in 2019 or 2020 IMO.

In terms of revenue targets and progress ATM had this to say within their FY;

“Whilst revenue growth in China and the UK are presently well behind original plan, this shortfall should be compensated by sales of infant formula in Australia and other products in both Australia and Asia”.

There are a lot more products and markets to assess now then there were just a couple of years ago, on balance and aggregate they appear based on that advice to be pretty on track.

The only real point of reflection is the revision of the 2016 revenue goal from $280M to $230M due to exchange rate movement, although since that revision there seems to have been some Fx relief, perhaps that will continue, who really knows

[Harrie]

No problem with any of that MAC, just a matter of the market cluing on to it I suspect. Interesting though that given Milfords average buy in price must be around the mid to high 70's, and that they could increase their holdings up another 5% at prices well below that to lower average cost, that they appear not to be doing so at this point?

[Fisherking]

It’s a worthy discussion NT,

The premium that a2 farmers receive in covering conversion and other costs over a1 farmers is 8 to 10%, ATM have told us that, however the retail premium is typically 50%, hence the potential of the a2 proposition.

I don’t know explicitly if ATM pay-outs to farmers swing as much over time or to the same extent that Fonterra’s pay-outs may do, though one would anticipate that Fonterra, simply because of their size and influence on farm gate prices, very probably do set an underlying market price in NZ, similarly with the large Australian dairy companies.

What does seem to be more certain though is that a2 retail prices have been consistent through both the rise and the fall in farm gate costs.

One can see the effect of high farm gate prices on both Fonterra and Synlait gross margins in the chart below.

ATM gross margins have not been affected, in fact they have risen, I attribute that to increasing efficiencies from an increasing scale of distribution and production including gains made at the Smeaton Grange facility offsetting any effect from the peak in farm gate prices.

If ATM are indeed reducing farm gate pay-outs right now we should see that already really quite nice gross margin pick even up a little further at HY15 reporting time, let’s see.

Gross Margins.jpg

Where are you getting the retail premium of 50% from? What i've seen in my local Countdown is 10% premium on regular milk. I cannot believe they are paying 50% more and selling for lower margin.