ATM - A2 Milk Corporation Limited

[Harrie]

The comparison to Bellamy's is interesting. Probably very similar yes...

ASX.BAL = 95m shares @2.89 = ~275m MCAP. This is based on 141% current growth rate and $116m revenue (they have a small profit but like ATM are investing for growth). Current revenue multiple = 2.37

ATM = 660m shares @55c = ~363m MCAP. 38% current growth rate on $154m revenue. Current revenue multiple = 2.36

Interesting how the two align so closely in terms of revenue multiple, me thinks that's not just luck. Arguably ATM has the greater market oppourtunity supplying "standard" milk rather than organic, which would account for negligible difference regarding growth rates.

The revenue multiple is an interesting metric but seems to be reasonably consistent among food producing companies operating primarily in the dairy industry. Looking at freedom foods their growth rate is sub 10% and yet revenue multiples are 3.52 with a mkt cap of $465m and projected revenue of $132m. My understanding is that projected revenue for A2 FY15 is $230m. If this is the case the revenue multiple is 1.52 based on market cap of 350k.
Admittedly freedom and A2 are in different markets but if the aussy market starts to value up A2M on the same basis then the SP could end up around $1.30. That's a little ambitious but its not too far away from MAC's $1.10 valuation.

[blobbles]

The revenue multiple is an interesting metric but seems to be reasonably consistent among food producing companies operating primarily in the dairy industry. Looking at freedom foods their growth rate is sub 10% and yet revenue multiples are 3.52 with a mkt cap of $465m and projected revenue of $132m. My understanding is that projected revenue for A2 FY15 is $230m. If this is the case the revenue multiple is 1.52 based on market cap of 350k.
Admittedly freedom and A2 are in different markets but if the aussy market starts to value up A2M on the same basis then the SP could end up around $1.30. That's a little ambitious but its not too far away from MAC's $1.10 valuation.

I think you might find they $230m revenue target is FY16 revenue target, not FY15. I think they will hit at LEAST $165m FY15, just taking into account the Aus market (they said their current growth rate is 40% in this market, 77m HY * 2 + (~20%*77)=~$165m. If they have some serious upside from China that may push them through to $180-190m plus any extra from US. This puts $230m next year as a very achievable goal, particularly if they are finding success in any one of their overseas markets. (I am picking 2 markets they should find reasonable success - China & USA). This years China result could be anything from 20-30m for all we know... next year... it could easily be 50m in fresh milk alone. A moderate success of 20m in USA/UK and they would have achieved FY16 with zero Aus growth (unlikely).

[blobbles]

Of course they could find no success in any other market, pull back to Aus and only make 200m in FY16, 250m in FY17, 300m in FY18 etc. This still raises the prospect of ATM becoming a divvie paying company of around 5-8c over the next few years. Shows you how important success in other markets are... I am quietly confident at least one will take off, we are already hearing of decent sales in China and a lot of exposure in the US can't be all bad for ATM...

[Harrie]

That's correct blobbles, I was getting a bit ahead of myself there. If your conservative estimate of $165m is correct, then applying the same revenue multiple as freedom puts the A2M price at around 88c. Again not too far from the brokers 90c target. Add perceptions of improvements in revenue from USA , china and squeezing a bit more out of the Aussy market and the 90c to $1.10 range looks possible. The risks of not hitting targets in these markets will keep the price within about 10% to 15% of the current price, or between 47c to 61c until proof of growth is an established Reality IMO

[Snoopy]

The revenue multiple is an interesting metric but seems to be reasonably consistent among food producing companies operating primarily in the dairy industry.

Making up new valuation metrics because conventional market measuring sticks don't understand the special circumstances of the company that you want to invest in is the sure sign of a bubble. Sorry to be so blunt about this, but I think it needs to be said.

SNOOPY

[Harrie]

Making up new valuation metrics because conventional market measuring sticks don't understand the special circumstances of the company that you want to invest in is the sure sign of a bubble. Sorry to be so blunt about this, but I think it needs to be said.

SNOOPY

If you want to be blunt then I'm not sure that a lot of your metrics add up either snoopy.
A lot of what you measure is historical and takes no account of opportunities going forward.
I have clearly outlined in post 3255 where IMO the risks are. The market has already assessed the risks of a2mc succeeding and the risks of not succeeding in the markets they have targeted. You are somewhat correct that a2mc is overvalued on current data, albeit highly pessimistic, but current valuations completely undervalue the stock if the growth opportunities come to fruition. With the SP of around 50c at the moment, all upside and downside risks are already discounted in the current price.
The sales multiple seems to be the only consistent metric that I can find as there is little variation between companies operating in the same space. I would expect that the lower the risk (or confirmation that sales targets are being achieved), the higher this multiple will go from present levels.
My assessment of possible price scenarios in previous posts above are based on sales revenues being achieved in the target markets.

[winner69]

Making up new valuation metrics because conventional market measuring sticks don't understand the special circumstances of the company that you want to invest in is the sure sign of a bubble. Sorry to be so blunt about this, but I think it needs to be said.

SNOOPY

For your info Snoopy, knowing the young uns will say 'this time it's different' and won't even bother read.

Freedom Price:sales ratio year by year since 2006 has been - .55 in 2006 and then .46, .46,, .36, .43, .66, .85, 2.06, 4.64 in Sep 2014 and now over 5 (Morningstar data)

So for years a PS of less than 1 and now 5 ..... see 'this time is different' and things are all honky dory. I fear we just don't get it Snoopy.

Like your comments mate, but have to be old and wise to appreciate them methinks

[Harrie]

Turns out that w69 has just proved that price to sales is not a metric that has been made up at all snoopy. Morningstar has considered this metric as reasonably valid otherwise why track it?
My point in above posts compares a2mc's current multiple with multiples of other companies operating in a similar space. That's not to say that there is a potential re rating possibility which would develop under different economic scenarios, such as interest rate hikes for example.

[winner69]

Turns out that w69 has just proved that price to sales is not a metric that has been made up at all snoopy. Morningstar has considered this metric as reasonably valid otherwise why track it?
My point in above posts compares a2mc's current multiple with multiples of other companies operating in a similar space. That's not to say that there is a potential re rating possibility which would develop under different economic scenarios, such as interest rate hikes for example.

High price to sales ratio (and 5 is high) generally means a high price earnings ratio.

A price sales of 5 with a 10% profit margin gives a price earnings of 50. A 5% profit margin a price earnings of 100.

What Snoopy was getting at was if the likes of Freedom has historically traded at less than 1 times sales whats so special now that they trade at 5 times sales and by implication why does a2 warrant 5 times sales. Of course I forgot 'this time it's different'

[Harrie]

High price to sales ratio (and 5 is high) generally means a high price earnings ratio.

A price sales of 5 with a 10% profit margin gives a price earnings of 50. A 5% profit margin a price earnings of 100.

What Snoopy was getting at was if the likes of Freedom has historically traded at less than 1 times sales whats so special now that they trade at 5 times sales and by implication why does a2 warrant 5 times sales. Of course I forgot 'this time it's different'

Morningstar's number for freedom looks like they exclude inter company revenues. With this included the price sales or the revenue multiple is more like 3.5 times.
I accept that it is traditionally high but then again freedom is a growth company. The recent revenue growth has not been spectacular which probably accounts for a lack of share price movement in the last year, however its also high because there are believers out there who obviously are expecting more future growth. It is no different with a2mc
You don't expect those sorts of multiples with established companies. If you assessed growth companies using p/e ratios you would never make an investment.
Right now, until further information is provided the range will be A$0.47c to A$0.61c for A2M. If current growth company revenue multiples are applied we could easily see A$0.86