ATM - A2 Milk Corporation Limited

[blobbles]

Me too but is there a bottleneck coming up where supply of A2 can't meet demand?

Maybe short term, but herds can be sorted relatively quickly. I have heard a month being bandied around as time required to separate out the A2 only producing cows from others (genetic test of tail hairs, separation of individual cows). As ATM pay a premium over normal milk, there is a big incentive for farmers to switch. As such supply issues should be short term only.

[kizame]

Have been researching ATM a bit more over the break....

Clearly there is huge demand coming from China with demand currently outstripping supply, this means the current 100% growth rate could be exceeded next year too. Remember that there will be a large boom of milk powder demand in the latter half of next year for the following 2 years from China. With ATM positioned at the top of the market there, this should provide a massive boost for ATM which we are only beginning to see.

My feeling here is if we start valuing ATM as a growth company, we can start using revenue multiples. Clearly they are pumping free money into new markets, which means they would likely be hitting 50m EBITDA this year.

My current pick is 8x revenue, $2.4 billion company, around $3.30 SP. Would be good to see Miners FCFF analysis. But with potentially doubling of revenue next year and maybe even the year after, we would have a billion dollar plus revenue company in 2 years only based on demand for milk powder in China and current fresh milk sales. If the other markets (US in particular) begin gaining traction, we could be looking at more. Likely that could mean a conservative $100m EBITDA company in 2 years. That's 10c dividends, with high growth.

One thing is clear now - a year ago we were worried that ATM would not be able to replicate their Australian success in another market. They just proved they can do it twice. This makes it far more compelling that they can do it again.

At roughly $2 or less, I am now keen on ATM long term and will be buying more on dips.

High growth, massive potential. These are the sort of investments I love!

Hi Blobbles, if I may ask what made you come up with 8x revenue?

How things have changed,it was a worry whether they would sell product now a worry whether they can supply in the short term haha,
but what a great worry to have.

don't hold sadly.

[skid]

Just keep in mind it has to be not only a demand for milk powder but for the A2 specialty version which of course cost more--will the numbers be prepared to pay the extra price?
Once that is established it will be far easier to come up with multiples.

Dont hold..sadly at last months SP
not so sadly at last weeks highs

[stoploss]

Just keep in mind it has to be not only a demand for milk powder but for the A2 specialty version which of course cost more--will the numbers be prepared to pay the extra price?
Once that is established it will be far easier to come up with multiples.

Dont hold..sadly at last months SP
not so sadly at last weeks highs

Strong start to 2016 on the ASX currently equivalent of around 193 cents . ( the day and year are but young ! )

[Ginger_steps_]

I was expecting a much bigger pullback after - strong demand for A2M on the ASX today. As overvalued as it may be, $2.50+ is looking like a real possibility by FY. Come on a2 - find us a miracle solution to the supply issue!

[Sideshow Bob]

Did someone pull their profile? About 10 pages of posts have disappeared.....

[Snoopy]

$37m is the upper bound of the $33m-$37m 'Operating EBITDA' range quoted in the market update of 18th December. Look further down the page on that news release and you will see that 'Operating EBITDA' is a non GAAP measure that equates to EBITDA before non recurring and intercompany charges.

The $33m-$37m figure appears to be the 'Operating EBITDA' for the entire company for FY2016. I can't find an equivalent figure in AR2015 for FY2015. So how much of an improvement this 'Operating EBITDA' represents over FY2015, I am not sure. The gist of the update is that the profit upgrade has come from higher than expected 'A2 platinum' infant formula sales in China. Last year 'China and Asia' contributed EBITDA of $1.774m ( AR2015 p100). But that figure is I think 'after intercompany charges', so the direct year on year comparison is obfuscated.

Information in the FY2015 results presentation (p3) shows how 'Operating EBITDA' and 'Group EBITDA' are related.

EBITDA Breakdown	FY2014	FY2015
Australia and New Zealand (Operating)	$18.7m	$30.0m
China and Other Asia (Operating)	-$3.3m	-$3.1m
UK and USA (Operating)	-$4.3m	-$12.1m
Corporate & Other (Operating)	-$7.5m	-$10.0m
EBITDA Total (Group)	$3.6m	$4.8m

'Operating EBITDA' (excluding Corporate and Other) for FY2015 total was therefore: $30.0m -$3.1m - $12.1m = $14.8m

This means that the operating EBITDA forecast for FY2016 of $33m to $37m, following the two profit upgrades, looks like being 120% to 150% higher than FY2015. That increase is welcome. Although even more welcome is the successful capital raising over 2015 that means ATM will not run out of money in 2016 after all. It is highly likely that actual net profit will -still- be minimal in FY2016. Because of the capital raising this isn't a problem. Spending all profits to develop markets has long been in accordance with the ATM business development plan.

However it does mean that a projected PE ratio in the high 30s could be around three orders of magnitude out. A PE of 39,000 for ATM in FY2016, not 39, looks much more likely.

SNOOPY

[GizyGold]

Bubble had started to burst on this the other day, director sold out some shares, world market turmoil overnight.... perhaps worth a short.

Good luck with shorting the hottest stock on the market at the moment. wouldnt be surprised if we see a $3 by year end. Even Fonterra looking the goods. Key with A2 is to get more dairy farmers to convert & supply Synlait.

[Snoopy]

$18.7m is the EBITDA earnings from Australia before licence fees and less investment in new market development of $7.5m and the undeclared 'corporate costs' which reduce EBITDA to $3.6m. So licence fees and corporate costs must be:

$18.7m - ($7.5m + $3.6m) = $7.6m

If we assume that 1/4 of corporate costs relate to Australia, while the other 3/4 go to developing China, UK and USA, then underlying EBITDA for Australia is:

$18.7m - ($7.5m + 0.25($7.6m))= $9.3m

Since Australia is the only developed market we can assume that all the Depreciation and Amortization relates to that market. We also assume zero interest costs.

So NPBT = $9.3m - $1.9m = $7.4m

Tax that result at 30% and you get NPAT of $5.18m. There are 660m shares on issue. So this gives earnings per share of:

$5.18m / 660m = 0.00785cps

A reasonable growth multiple might be 20 if ATM finds itself an Australian only brand in the future.
So fair value for ATM Australia is.

20 x 0.00785 = 15.7c

The above estimate was for the Australian arm of ATM only, assuming the global expansion plan fails. All based on FY2014 published results. This was never a prediction. Just a calculation of what could happen if the rest of the world expansion went pear shaped.

So time to redo the above calculation using FY2015 results for future comparative purposes. Note that there are several changes in my approach, different to how I did things last year.

Time to revisit the value of by far the most profitable division of A2 milk so far - Australia and New Zealand. For this I use the 'Segment Information' that starts on p100 of AR2015.

EBITDA (Australia & New Zealand)	$5.724m
plus 1/4 of EBITDA (Corporate & Other)	$0.821m
plus Reversal of one off EBITDA loss (ASX Listing)	$1.681m
less Net Interest Charge	$0.000m
less Depreciation & Amortization	$1.949m
TOTAL EBT	$6.277m

Using the Oz 30% tax rate, because the operating profits we are most interested in come from Australia.

NPAT = (1-0.3) x $6.277m = $4.394m

Using the number of fully and partly paid shares on issue at year end , 660m, and a PE of 20 (a figure I judge as suitable for a high growth food company restricted to Australasia) we can calculate the 'per share' value of the company as follows:

$4.394m/ 660m = 0.00668cps x 20 = 13.3c

SNOOPY

[Snoopy]

Does a PE ratio tell you much when the company has historically been taking the profits from Australia and using them to build new markets? If all the earnings are being re-invested, doesn't leave much for the ratio. I find it quite interesting that given that strategy and the recent $43 million capital raising, they're now forecasting EBITDA > $33 million. Perhaps they're now earning more than is needed to get going in America, or the pick up from formula has been too sudden to allocate elsewhere.

The PE ratio for ATM is not important in the sense that it is ATM company policy to reinvest all profits in market development. You are quite right about this mfd. I only mentioned PE again because someone else did, and I don't think they got their calculation right. The American investment is still slated to be $20m over three years (one year already gone).

Most of the pick up in formula seems to be in China. This was still a loss maker last year. So the pick up in formula sales will initially go towards reducing those losses rather than creating windfall profits IMO.

SNOOPY