ATM - A2 Milk Corporation Limited

[Joshuatree]

29cent swinger today ; back up in a milky sway.

[Snoopy]

Snoopy - you (along with others) will never make much sense from a2 segment analysis. Save the effort for other stuff

Just believe the A2 story - a story that says its a billion dollar company and one day maybe a 3 billion company

Not quite ready to give up yet Winner. I like the product and am accepting of the company strategy, while noticing the lessons learned along the way. However, just like when you ran some numbers yourself last year, I can't make the investmant case stack up. Mind you, this kind of 'growth investing' isn't my forte. So I probably have some lessons to learn.

I have done some rethinking over the last two days, and I think I need to tweak my analytical approach.

I intend to go back to the FY2014 result, because this is the base case I am using for all subsequent results.

I can take it one step further than that.

$18.7m is the EBITDA earnings from Australia before licence fees and less investment in new market development of $7.5m

After scrawling back through the FY2014 material the only reference I can find to this 'investment in new market development' (growth) of $7.5m is your post 2339 Winner. I had assumed that this was money set aside to development new A2 product categories in Australia. Yet after re-reading the results, this $7.5m figure looks more likely to relate to an $7.527m EBITDA loss incurred in developing the British and Chinese markets during FY2014.

We all know the A2 business model: generating free cashflow from Australia to fund the growth of other markets. But if I look at an Australia only future for A2, my base valuation case, this spending suddenly becomes optional. So I should not have considered this in my 'Australia only' valuation.

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

The above assumption I think is still sound.

Since Australia is the only developed market we can assume that all the Depreciation and Amortization relates to that market.

Looking on page 69 of AR2014, $1,234m of depreciation relates to Australia and $0.658m relates to New Zealand. However, as from 2015 these two markets have been combined for reporting purposes.

SNOOPY

[Snoopy]

I can take it one step further than that.

$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.

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

At 63c, ATM has an awfully long way to fall to get back to fair value. There is some chance, say 25%, that ATM will become an Australia only company in a few years. So such a scenario needs to be factored in to what ATM is worth.

This time I will use the segmented information used on p69 of AR2014. This (I think!) avoids all the confusion introduced with intercompany charges and licence fees that seem to have confused me before.

EBITDA (Australia)	$4.517m
plus EBITDA (New Zealand)	$3.004m
less Net Interest Charge	$0.000m
less Depreciation & Amortization	$1.900m
TOTAL EBT	$5.621m

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

NPAT = (1-0.3) x $5.621m = $3.935m

Using the number of shares on issue at the time , 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:

$3.935m/ 660m = 0.00596cps x 20 = 11.9c

SNOOPY

[Snoopy]

$3.3m + $4.2m = $7.5m is the HY2015 EBITDA earnings from Australia before licence fees and less investment in UK market development of $4.2m and the declared 'corporate costs' which reduce EBITDA by $5.2m.

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:

$7.5m - (0.25($5.2m))= $6.2m

Since Australia is the only developed market we can assume that all the Depreciation and Amortization relates to that market.

So NPBT = $6.2m - $0.9m = $5.3m

Tax that result at 30% and you get NPAT of $3.71m. There are 660m shares on issue. So this gives 'annualised' earnings per share of:

2X $3.71m / 660m = 1.124cps

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 0.01124 = 22.5c

At 56c, ATM is priced well in excess of Oz market only fair value. So there is a large amount of blue sky built into the share price already.

The plan is to spend $20m in the US over three years ( $US20m/(3 x 0.75) = NZD8.9m per year). They could only do that with current resources if the UK becomes self sustaining (loss in UK for HY2015 of $NZ4.1m). Not enough money to go around (only $9.9m in the bank as at December 2014 ). Cash resouces will be completely drained this year! The likelihood of a cash issue is getting stronger and stronger. ATM will be bankrupt within months if it doesn't do it.

My advice: Don't touch this until the cash issue is announced.

Once again I take a consistent (but slightly different) retrospective approach to assess share value. This is mainly based on the segmented results as listed on p17 of the interim report

EBITDA (Australia & NZ)	$4.876m
plus 1/4 of EBITDA (Corporate & Other)	$0.039m
plus One off Australian Listing Charge	$0.762m
less Net Interest Charge	$0.000m
less Depreciation & Amortization	$0.912m
TOTAL EBT	$4.765m

Annualising that 6 monthly result gives an annualised EBT of:

2 x $4.765m = $9.530m

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

NPAT = (1-0.3) x $9.530m = $6.671m

Using the number of shares on issue at the time , 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:

$6.671m/ 660m = 0.01112cps x 20 = 22.2c


SNOOPY

[Baa_Baa]

@Snoopy any way you look at it on pure FA the SP is way ahead of itself. Or you may be working with bogus reporting numbers? Do you need to incoporate a growth factor to interpret the SP? Or is PE20 the factor? It's not too late to drop this from the 2016 comp if it looks like the year will be playing catch up to reality.

[winner69]

Snoops me old mate - how about this

Guidance F16 is $39m ebitda, say $25m NPAT. Essentially this is Aus/Asia - yes?

So Aus/Asia business at your 20 PE is $500m, 75 cents/share

UK/America going to be gangbusters i'm told - so double the 75 cents and you get a total business valuation of $1.50

Maybe current price not too far off a reasonable valuation.

Believe the story

[kura]

It seems like attempting to do fundamental analysis on a growth company is extremely difficult & almost irrelevant. How do you put a value on growth potential ??

Would fundamental analysis on XRO tell me anything different from my gut feel ? ( Disc: my gut keeps me away from XRO , but at least ATM makes profits)

[Snoopy]

This time I will use the segmented information used on p69 of AR2014. This (I think!) avoids all the confusion introduced with intercompany charges and licence fees that seem to have confused me before.

EBITDA (Australia)	$4.517m
plus EBITDA (New Zealand)	$3.004m
less Net Interest Charge	$0.000m
less Depreciation & Amortization	$1.900m
TOTAL EBT	$5.621m

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

NPAT = (1-0.3) x $5.621m = $3.935m

Using the number of shares on issue at the time , 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:

$3.935m/ 660m = 0.00596cps x 20 = 11.9c

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]

@Snoopy any way you look at it on pure FA the SP is way ahead of itself. Or you may be working with bogus reporting numbers?

I would hope that accounting standards are tough enough to disallow the possibility that results are bogus!

Do you need to incoporate a growth factor to interpret the SP? Or is PE20 the factor? It's not too late to drop this from the 2016 comp if it looks like the year will be playing catch up to reality.

A PE of 20 incorporates quite a lot of growth in a single market sense. It would not account for the successful 'roll out' of A2 in several international markets though.

SNOOPY

[Snoopy]

It seems like attempting to do fundamental analysis on a growth company is extremely difficult & almost irrelevant. How do you put a value on growth potential ??

Kura, fundamental analysis relies on taking data from an existing business and trying to extrapolate what that data might mean for profits in the future. Australasia is the only market which has been profitable for more than one year. So if you want more than one data point, the Australasian Segment is the only place to look.

Next you would have to consider whether the Australian roll out model can be repeated in overseas markets. My gut feel? Because of the Australian Supermarket Duopoly it is much harder to get a beachhead on supermarket shelves in Australia. However once a product is on the shelves at one chain (say Coles) then any sales success will likely see Woolworths follow up putting the same thing on their own shelves quickly! How does this relate to overseas (beyond Australasia) expansion for A2?

I would say that initial expansion overseas would generally be easier, as it is more likely that A2 will be able to persuade at least one niche chain to stock the product. However, because competitors would not see the same need to follow the fortunes of every little market player, market growth will probably take longer than in Australasia.

If therefore you accept that the Australasian market has a value per share of 13.3c, this tells you that the A2 share price is already factoring in equal success in around ten other equally sized markets around the world. Put another way, unless A2 is successful in 10 more markets the size of Australasia, we can expect the value of A2 shares in the long term to decrease. Consequently I would argue that this type of fundamental analysis is very useful. While A2 as a product is likely to succeed, it is almost certain as an investor today that you will lose money in the long term if you invest in the A2 company today. This isn't becasue the A2 company managment is poor (it isn't). It is because shareholder expectation is too high. This is why A2 senior managment, like Babbage, are selling their shares.

My FA is showing a big red flag here that you should not invest. I call that very useful information indeed!

Would fundamental analysis on XRO tell me anything different from my gut feel ? (Disc: my gut keeps me away from XRO , but at least ATM makes profits)

Check the accounts again. A2 was loss making in FY2015, and there has been no guidance given for a positive NPAT in FY2016.

SNOOPY