ATM - A2 Milk Corporation Limited

[MAC]

Snoopy, ATM have a plan to enter the NZ fresh milk market, have a quick look back at their last few presentations. As I understand, It’ not so much that A2 milk hasn’t taken off in NZ, it’s more that ATM own the IP and have been reserving significant entry thus far while they tackle larger and more lucrative global markets.

Growth stocks are not easily valued and PE shouldn’t be considered as a primary tool in isolation at this stage in a business cycle. Unlike other start-ups in the dairy sector at present ATM is both investing heavily in growth, and, also generating modest profits at the same time, hats off to them.

Average revenue in the last two years was 45% and if ATM meet their expectation of achieving $280M in revenues by FY16 then this also provides us with a forward revenue growth rate of 45% for the next four years.

The challenge in valuing ATM, as I see it, is in estimating where forward top to bottom line margins will ramp up to over the next few years.

ATM have a unique business model with a mix of direct production, contract production, joint ventures and direct sales which does make it difficult to assess forward profitability. However, the common thread is the additional margins generated by owning the intellectual property and through having a niche product which demands a higher over the counter sales price above and beyond all their competitors.

It would seem that most would value ATM higher than yourself, each to their own, but I suspect you will be waiting for a very long time indeed if you really do expect to see ATM at $0.20 or anywhere near to it.

Mac

[biker]

This from Geoff Babidge, MD, "The reason the business in New Zealand is pretty modest is that some time ago, prior to the recent shareholders and board of management, the company issued a whole raft of licences to small operators. That model proved not to be particularly efficient,"

In New Zealand, North Auckland dairy company Fresha Valley has the licence to produce homogenised A2 milk in one and two-litre containers.

[Snoopy]

This from Geoff Babidge, MD, "The reason the business in New Zealand is pretty modest is that some time ago, prior to the recent shareholders and board of management, the company issued a whole raft of licences to small operators. That model proved not to be particularly efficient,"

In New Zealand, North Auckland dairy company Fresha Valley has the licence to produce homogenised A2 milk in one and two-litre containers.

Thanks for the explanation on the failure of A2 to develop in NZ, Biker and KW. I guess this shows the importance of choosing the right partner(s) with which to roll out your product. My point was that with a PE of 80 you are pre-buying assumed success which may not roll out as you anticipated.

Look at all the enthusiasm that the market greeted the involvement of Agria providing a channel for PGW to sell their seeds into China. That enthusiasm saw PGW shares soar into the 45c range. Yet when it became clear there are no quick dollars to be made in China PGW shares lost more than a third of their value. I don't think many people would argue with the pure quality of the Methven plumbing products. Yet they have had a terrible time trying to break into the UK.

My point is just because you have a great product, that is not a licence to print money overseas. IMO A2 faces huge market development risks that are not at all reflected in the share price. That doesn't mean I don't wish them all the best for the future though. But from a risk return perspective I think a share price at anything higher than the last cash issue price is too high at this stage of the development cycle. And if anything does go wrong, the share price is likely to retreat towards the 20c that the shares were trading at before the recent market euphoria.

SNOOPY

[Snoopy]

Growth stocks are not easily valued and PE shouldn’t be considered as a primary tool in isolation at this stage in a business cycle. Unlike other start-ups in the dairy sector at present ATM is both investing heavily in growth, and, also generating modest profits at the same time, hats off to them.

Yes, it was the fact that a growth company was actually generating profits that grabbed my attention in the first place. Personally I would never consider investment in any company that has never made a profit, although I recognize that other investors have different perspectives.

Average revenue in the last two years was 45% and if ATM meet their expectation of achieving $280M in revenues by FY16 then this also provides us with a forward revenue growth rate of 45% for the next four years.

It is very easy to convince yourself of high values if you use extrapolation as an investment tool. Somehow I doubt that revenue will rise 45% in Australia even this year. A 45% rise in revenue for A2 may indeed be possible, but it will take hard work in new markets to achieve it.

The challenge in valuing ATM, as I see it, is in estimating where forward top to bottom line margins will ramp up to over the next few years.

ATM have a unique business model with a mix of direct production, contract production, joint ventures and direct sales which does make it difficult to assess forward profitability. However, the common thread is the additional margins generated by owning the intellectual property and through having a niche product which demands a higher over the counter sales price above and beyond all their competitors.

It sounds like A2 have learned from their 'mistake' in the way their NZ market push was handled. I agree the A2 intellectual property is the kind of 'moat' I look for in evaluating new investments. So there are definitely some positives there. The risk here IMO is overpaying to gain exposure to the business. Not that the product is no good.

SNOOPY

[MAC]

I’m not sure the rest of us are seeing any euphoria.

What we are clearly seeing is steady well managed growth over the last three years as the company progressively de-risks and is now reliably growing revenues at 45% per annum based on ever improving models for monetising their intellectual property.

ATM estimate this growth rate will continue for the next four years as they enter new markets and they appear to be walking the talk. The next step in de-risking should occur when we receive sales reports from the 900 outlets in the UK.

I respect bearish views, they keep us all cognisant, and I wish you luck in your endeavour in wishing to enter at 2011 valuations.

ATM.jpg

[Hoop]

I’m not sure the rest of us are seeing any euphoria.

What we are clearly seeing is steady well managed growth over the last three years as the company progressively de-risks and is now reliably growing revenues at 45% per annum based on ever improving models for monetising their intellectual property.

ATM estimate this growth rate will continue for the next four years as they enter new markets and they appear to be walking the talk. The next step in de-risking should occur when we receive sales reports from the 900 outlets in the UK.

I respect bearish views, they keep us all cognisant, and I wish you luck in your endeavour in wishing to enter at 2011 valuations.

ATM.jpg

Hmmm...Mac you quote 45% pa annum growth and I see your chart is showing a 644% price increase over 3 years...That's an unusually rapid uptrend don't you think? A Share price uptrend well ahead of its fundamentals with no long pauses and no healthy corrections???.....I can why some people would take a bearish view...eh

[MAC]

I agree with you hoop, I also equally think that a suggestion of a 320% correction to a share price of $0.20 is rather perma bearish.

Note too that it’s 45% revenue growth p.a and ATM are investing heavily like other growth companies to achieve future NPAT. The SP needs to be justified by analysis of forward NPAT manifesting from this high rate of investment. Consideration of future margins is also important.

[hilskin]

A2 milk now selling yoghurt in the OZ. This from there facebook page about an hour ago.

"Did someone say Yoghourt? a2 Jalna Natural Low Fat Creamy Yogurt comes in 1kg tubs and is available at Coles and leading Independents. ‘Share’ the word!"

[Lease]

I do agree ATM is very expensive. But the overall NZX is not that expensive, therefore I reckon ATM SP still have room to go up until market get crazy.

If ATM is down to below 20C, it's either the Company fundamentals incur serious problems, or the overall market crashes.

[MAC]

I’m continuing with a bout of positivity for ATM, there's just so much negativity in the world to balance.

This is encouraging from the UK;

Tesco are retailing 2 litre bottles of A2 for £1.99. This compares to Tesco’s home brand 2.27 litre (4 pint) bottles retailing for £1.29. Also, seems to be a promotional sale at present of two bottles of A2 for £3.00, all the better to kick things along.

http://www.tesco.com/groceries/Produ.../?id=275206388

It’s an interesting price point as it appears to have equivalency with the selected Australian premium of 150% times home brand retail prices, and therefore probably very similar margins.

Perhaps we will get some initial indication of sales volumes at full year reporting, 9 weeks away.

It would be nice to see the UK venture de-risking like the Australian operation.