ATM - A2 Milk Corporation Limited

[Snoopy]

If say the chance of success in Australia is 100% (they have successed already) the chance of success in the UK is 75%, the chance of success in China is 75% and the chance of success in the USA is 50% (after all A2 have had one failed attempt there), then all of these probabilities must be muliplied together to get the chance of overall success.

1.0 x 0.75 x 0.75 x 0.5 = 0.28

So the fair value price to pay today based on Forsyth Barrs conquered USA assessment is:

0.28 x $1.24 = 35c

PS That 22.5c (my post 3070) I quoted for Australia only was assuming they abandoned their expansion plans in China, USA and UK. You can think of it as a 'lower bound' valuation, should all the overseas markets turn to custard.

Time for a bit of creative good news for you hapless ATM shareholders.

Let's redo these market success probabilities as follows:

Chance of success in Australia: 100%
Chance of success in United Kingdom: 85%
Chance of Success in China: 85%
Chance of Success in USA: 75%

Value of ATM should rollout to USA succeed in the future: $1.24

Risk adjusted today value for grand plan corporate roll out for ATM in the United Staes to succeed:

$1.24 x 1.00 x 0.85 x 0.85 x 0.72 = 52c

PT asked what I meant by 'succeed'. Each stage in the marketing plan must generate enough cash to fund the next stage. (this assumes no further capital raising by the company). Australia has 'succeeded' because it already generates enough cash to fuel the expansions mostly into the UK. The UK does not (yet) generate the cash to expand into the USA. My model assumes that Australia will continue to fund growth in Australia and the UK even when the UK starts generating surplus cash. That UK surplus cash will be sent off the United States to fund expansion there.

China is interesting because anecdotally some of the sales made in Australia are shipped off to China. It is not clear to me how many new direct China sales are incremental sales or just substitutes for goods that used to be bought in Australia. But I am assuming in my model that China must eventually 'succeed' in its own right to continue the global expansion plan.

So this calculation shows that ATM is indeed worth the current market price! Those probabilities do show that much of the forward success is already built into the share price at 52c though. Any weakness in cash generated from here could see the share price plummet as the need for a capital raising becomes urgent. I can't really understand why ATM management don't do it now ( aka Xero ) rather than taking the company to the brink like this. I can only assume it is because the existing large shareholders would not support a capital raising now. That could prove a costly misjudgement for all shareholders later.

SNOOPY

[RGR367]

@Martyguptill drinks a2M!!!

[drcjp]

I have watched with some amusement all the tooing and froing over what is considered to be a "fair" price for ATM.
Fair has very little to do with it.

Someone is simply "shaking out the woodies" on ATM at the moment and I am dead certain that will stop in less than three weeks. Wonder why?
Then the price will go as far as the brokers can push it. Its that simple.

As for the fair value of ATM? Its not dictated by equity, assets or strategy. Its dictated by TURNOVER.
ATM represents a logical buyout company as it is asset poor and market rich. Its true capital is its turnover.
Just like a biotech, most of its IP is biotech derived.

Take over valuations on that style of company are in the vicinity of 2.5-4x the turnover. That puts its SP at 0.65 to 1.03 based on FY2015 coming up of $170M. Most biotech takeovers operate on a return phase of 4-5 years giving time to eek out the true alternative values of the IP eg. A2 derived creams, ointments, wellness products, etc.

ATM is not overpriced and proposing a value of 0.015 per share?....well.

PEB is overpriced as it has no capital turnover....yet.

BLT should be put down. That company has been mismanaged for years...cannot understand why the current CEO is still there.

Disclosure: own more than a few ATM and work in biotech sector. Actually made money out of BLT back in early 2013.

[SwampRat]

Snoopy - your maths is wonky. You just calculated a 52% probability of ATM 'succeeding' on all fronts, not a fair share price of 52c.

[skid]

There are a no. of companys that are more or less betting the farm on the making it in the US --It would be interesting to research who has actually successfully achieved this -and how. (i realize ATM has a no. of markets)--which brings me to my next thought--Do the Chinese really give a toss about the benefits of A2?--or is it just a case of milk is milk?(as long as its not poisoned)

[NT001]

--Do the Chinese really give a toss about the benefits of A2?--or is it just a case of milk is milk?(as long as its not poisoned)

That’s a good question, Skid, and I don’t think a2MC have said very much about it. There is a general view that Chinese have a high degree of lactose intolerance, and it may be that this is actually intolerance of A1, which could be a strong selling point for A2 in a country where consumers are keen to adapt western dietary trends including dairy consumption. Perhaps word is getting around anecdotally that A2 milk is kinder.

A recent report I read (sorry I can’t find the source at this moment) said:

Although there are no official figures, studies have indicated that lactose intolerance affects around 30% of Chinese children, and a study of Chinese adults showed that 92.3% suffered from some level of lactose mal-absorption.

And Britain’s National Health Service says on its website:

Rates of lactose intolerance can differ significantly between different ethnic groups. For example, it is thought that … most people of Chinese descent have the condition.
This may be because people from places where there has historically been no ready access to milk, such as Africa or east Asia, may not have evolved the ability to digest lactose as there was no significant benefit in being able to do so. In the UK, lactose intolerance is more common in people of Asian or African-Caribbean descent.

From all this it would seem likely that many Chinese consumers want to drink more milk but find milk containing A1 gives them digestive difficulty. It would be interesting to know how much a2MC pushes this line in its Chinese promotion.

[blobbles]

There are a no. of companys that are more or less betting the farm on the making it in the US --It would be interesting to research who has actually successfully achieved this -and how. (i realize ATM has a no. of markets)--which brings me to my next thought--Do the Chinese really give a toss about the benefits of A2?--or is it just a case of milk is milk?(as long as its not poisoned)

Chinese consumers are actually very clued up,particularly when buying foreign milk. I have heard them having discussions about why one countries milk is better in some ways than another countries (in China, in Walmart/Carrefoure/Metro). It stands to reason that a clued up population who have a slight natural intolerance to milk will want to buy a milk which is easier to digest.

ATM definitely are not betting the farm on the US market, they are placing themselves in lots of markets to see which ones take. If any of them do, they win big. With their high margins they will scale well wherever they succeed.

[Snoopy]

Snoopy - your maths is wonky. You just calculated a 52% probability of ATM 'succeeding' on all fronts, not a fair share price of 52c.

Swamprat, in the plan to conquer the USA market development will be funded by free cashflow out of the UK. Likewise, the plan to conquer the UK is funded by free cashflow out of Australia/China. So the plan to conquer the USA does require ATM to succeed on all fronts. Break one link in the cash supply chain and the plan for the conquest for the United States fails. You may disagree with my assumptions of course. But I stand by my maths as being absolutely correct.

SNOOPY

[Snoopy]

As for the fair value of ATM? Its not dictated by equity, assets or strategy. Its dictated by TURNOVER.
ATM represents a logical buyout company as it is asset poor and market rich. Its true capital is its turnover.
Just like a biotech, most of its IP is biotech derived.

Take over valuations on that style of company are in the vicinity of 2.5-4x the turnover. That puts its SP at 0.65 to 1.03 based on FY2015 coming up of $170M. Most biotech takeovers operate on a return phase of 4-5 years giving time to eek out the true alternative values of the IP eg. A2 derived creams, ointments, wellness products, etc.

ATM is not overpriced and proposing a value of 0.015 per share?....well.

Disclosure: own more than a few ATM and work in biotech sector.

Drcjp, I appreciate your hands on perspective from working in the Biotech Sector.

'Turnover' is not too different from the price to sales ratio that Harrie is touting. Not sure that I would agree with you about ATM being a biotech share though.

In the early days I believe it would have been correct to call ATM a biotech. Their main technology push was the test to sort A1 milking cows from pure A2 milking cows. Then when that approach wasn't getting much traction they became interested in joint ventures to push A2 milk itself onto the market. A2 milk is just that: milk. Not some high tech biotech procedure or product.

OK perhaps 'just milk' (albeit milk containing exclusively the A2 beta casein protein) is selling things short. ATM are purveyors or liquid milk, baby formula and other dairy products. But we are talking about product worth dollars per litre. Not hundreds of dollars per litre.

I also question your presumtion of a 'logical buyout company'. I am not sure A2 see being taken over as an end game. And if you do see ATM as a buyout opportunity, are you not valuing ATM on the basis of a takeover that may never eventuate?

Not sure about your extended market vision of A2 derived creams and ointments. Doesn't A2 intolerance stem from the digestive system? Is it a fair extemsion to say that A1 intolerant milk consumers will suffer similar intolerane with a topically applied skin cream?

I won't argue with your point that biotech company are in the vicinity of 2.5-4x the turnover. But applying that rule to ATM, should you not apply that multiple to the IP derived revenue that the conmpany earns, and not the mass market milk revenue?

SNOOPY

[NT001]

...Most biotech takeovers operate on a return phase of 4-5 years giving time to eek out the true alternative values of the IP eg. A2 derived creams, ointments, wellness products, etc.

It wouldn't be possible to exploit a2MC's IP through A2-derived wellness products such as creams and ointments. A2 is not in any way touted as a "cure" or treatment for anything, not even for health conditions created by A1. It has no curative powers at all, as far as is known.

It's simply that by switching to pure A2 you're avoiding the ongoing harmful effects of consuming A1, such as digestive problems and the symptomatic impacts of certain medical conditions such as eczema, autism and schizophremnia. Sufferers of autism, for example, often find switching to A2 is beneficial because although it doesn't cure their disease they experience a considerable reduction in behavioural side-effects that are now believed linked at least partially to drinking A1 milk.