ATM - A2 Milk Corporation Limited

[Snoopy]

Snoopy wrote:
My best logical conclusion: ATM have approached their major shareholders and those shareholders do not support a cash issue, even a modest one. They don't want to see their stake diluted and they don't want to part with more cash. But from the outside that looks like ridiculous gamesmanship. So much at risk for what is in corporate terms a very modest capital injection.

I think KW might be right. Get a new Chairman on board, and make sure a couple of directors are Aussie. Get an Australian institutional investor on board via a placement. Makes sense. But also makes for a soft share price going forwards until the new investor is bedded in.


Harrie Replied:
Snoopy. Whats the difference between an institutional placement, and a rights issue to existing shareholders? Actually nothing because both have the effect of diluting the shares. If existing institutional shareholders are not happy to fork out more cash now and diluting their stake, why would they be happy to see another institutional investor take a placement of shares and acheive the very thing existing shareholders are supposedly trying to avoid?

Good question Harrie. Australia is one step closer than NZ to wider Asian 'first world' markets like Singapore, Hong Kong, Japan and even those East Coast cities in China A2 already targets. I think A2 will be seeking a strategic partner in Australia that has expertise in Asia for longer term expansion. A partner that brings something to the table will shrink the share of existing shareholders - true. But if that same partner can help bake a bigger overall high then all shareholders will benefit.

SNOOPY

[Snoopy]

‘Steady as she goes’ approach pays off for A2 Milk..

<snip>

With its sales going gangbusters in Australia, the A2 Milk Company should have a great springboard for global expansion.
But... <snip>

To be fair, some of the company’s previous difficulties have been out of its control: For example, it launched its branded infant formula into China in November 2013 around the same time as Fonterra’s botulism false alarm. The subsequent regulatory reform in China has slowed that initiative, which is something the company is working hard to get back on track.

The above comment is ridiculous. In food markets in particular, there are always things that crop up that are outside a company like A2s control. To assume that there won't be is just poor management. "We take the credit for our success but blame someone else for our failures." Anyone running a business on that philosophy doesn't earn much credit with me.

Mr Babidge says the company continues to make progress in resuscitating sales momentum in the UK liquid milk market as well as the infant formula market in China, where it spent $1 million on marketing despite having limited product on the shelf.

So the sales campaign went ahead in China even though they had virtually no stock to sell. Why not postpone the campiagn until the stores were restocked? This is good managment?

“Sales of product in second half will increase,” he says, “and certainly we are looking at [financial year] 2016 being at least break-even up there.”

So probably no profit from China this year. Not a biggie.

He expects the company to ramp up sales In the UK in the second half of the 2015 financial year, having gained access into Sainsbury supermarkets as well as Tesco and established a revised business model.

So the real funding for the US expansion will most likely be coming from a profitable UK. I hope Babbage has a plan B if his 'expectations' in the UK are not met.

First NZ Capital has an “outperform” rating on the stock, noting yesterday that the result exceeded its expectations. Leveraging the company’s successful Australia model globally remains key.

This is a ducks lining up forecast. If Australian growth continues, and if the UK market becomes profitable and if they can replicate the success in other markets then we can justify a high valuation. There are a lot of ifs in that valuation. Yet nothing has fired, in profit terms, outside of Australia yet. And the capital expansion bin is bare.

The United States looms as another opportunity and A2 is targeting a launch into the fresh milk market of the West Coast in the fourth quarter. The plan is to launch through a wholly owned subsidiary with packaging outsourced.
<snip>
“It’s a very attractive market. We are going to be very disciplined how we move with respect to that focusing on one region on the West Coast.”

<snip>

“It’s a very large, interesting dynamic sector in the US market - certainly compared to every other key milk market that we have investigated.”

So more things going on that managment can't get a firm handle on than other markets? Maybe not quite as simple as just rolling out the Australian model?

First NZ’s analyst calculates a cash burn of $US20 million spread over the next three years for A2 to implement its strategy up there.

No they didn't. That $20m development budget is from A2 itself, based on the expected cash available, should things go to plan. It wouldn't surprise me to learn that more than $20m is needed to conquer California, let alone the rest of the US.

“Based on our previous ‘what-if’ analysis for A2 <snip>

I can produce a spectacular valuation with a 'what if' analysis too!

Mr Babidge says the company is focused on balancing revenue and growth with marketing and investment.
“If you look at the real health of the business, it's reflected in the Australian business performing exceptionally strongly in both revenue and earnings.”

Market budget = Cash Generated

How that relates to the actual capital investment needed to conquer a market is not being investigated.

Strategy going forwards is: Earn , Spend, Hope.

SNOOPY

[MAC]

Attachment 7138
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[babymonster]

currently 58c seller is 3x more than 57c buyers.. the sp may go back to 57c today...

[sb9]

Can tell you there are quite a few offmarket transactions gone thro' today, in multiples of 30k,20k,55k etc....all at 58c

[sb9]

https://nzx.com/companies/ATM/announcements/261285

ACC on board...

[mayday]

shares acquisition from director, brilliant!

https://nzx.com/companies/ATM/announcements/261285

ACC on board...

[RGR367]

Got my very first bundle (at 56 cents) today from the transaction made from selling XRO yesterday May we all be right on how see this so GL to us all.

[Harrie]

I think A2 will be seeking a strategic partner in Australia that has expertise in Asia for longer term expansion. A partner that brings something to the table will shrink the share of existing shareholders - true. But if that same partner can help bake a bigger overall high then all shareholders will benefit.

What's wrong with freedom foods being that partner. Its been noted already that Freedom foods will be one of the big winners out of the Aussie/China free trade deal. Freedom own ~ 17% of a2mc, and freedom already have a fairly comprehensive distribution network in China so it would make sense for a2mc and freedom for a2mc to piggy back on that wouldn't it? No placement of shares required to fund it.

there are always things that crop up that are outside a company like A2s control. To assume that there won't be is just poor management. "We take the credit for our success but blame someone else for our failures." Anyone running a business on that philosophy doesn't earn much credit with me.

In general yes snoopy but to be fair the china registration arrangement could not have been anticipated even by the astutest of management. Fair enough though about stopping the sales campaign though although there may have been a contractual commitment there.
First NZ’s analyst calculates a cash burn of $US20 million spread over the next three years for A2 to implement its strategy up there. No they didn't. That $20m development budget is from A2 itself, based on the expected cash available, should things go to plan. It wouldn't surprise me to learn that more than $20m is needed to conquer California, let alone the rest of the US.

Quite possible, but they are not going to go any further until they can establish some growing market share in California. At that point they either are generating positive cash flow to fund further expansion in other states or really go for it by a rights issue which comes back to your point. They have to be pretty sure they are getting at lot of enquiry/demand from outside California.


I can produce a spectacular valuation with a 'what if' analysis too!
Yes I accept that

If Australian growth continues, and if the UK market becomes profitable and if they can replicate the success in other markets then we can justify a high valuation. There are a lot of ifs in that valuation. Yet nothing has fired, in profit terms, outside of Australia yet. And the capital expansion bin is bare.

This is where I totally agree with you. There are a lot of if's. Its a growth company. Of course there are plenty of ifs. If there wasn't the price would not be where it is now.

[blobbles]

Director buying in... definitely a good sign. 300k more shares for someone that already has 1.1 million... can't argue that they aren't confident of their plan now, they are literally putting their money where there mouths are.