ATM - A2 Milk Corporation Limited

[King1212]

The following from SML's presentation to the Select Equities Conference, released to NZX today......

ATM nicely positioned.

Attachment 9257

yes saw that couple weeks ago..last update. that why I bought in..because I can see SML sp double or triple next year. As the cap at the moment is $1.5b compare with ATM of $6b

[Snoopy]

Earnings growth for FY2018 to FY2020.

2 x 1.2 x 1.2 = 288%

A 288% incremental increase in the A2 cow herd in just three years is quite a few female calves to born. If half the cows born are female we are talking about:

2 x 288% = a 576% increase in A2 cows to be born.

And 'new' cows won't be ready top calve (compound in accounting terms) until 24 months is up, at the very earliest. So all the required growth needed to have started two years ago. You can't just rack the growth up year by year in cows by putting them on a spreadsheet Beagle. And I still have yet to factor in the removing of the old cows at the other end of their production life.

Worth noting that Synlait have substantial headroom with processing capability outside of ATM contractual arrangements and we know it would be easy enough for more A2 herds to be brought "into the fold"

What A2 herds to be 'brought into the fold'? I don't believe there are any, not fully A2 herds at least, which is what you need.

Can I suggest you A2 shareholders read Keith Woodford's paper on breeding A2 cows

https://keithwoodford.files.wordpres...ding-paper.pdf

I draw your attention to page 6 in particular

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The speed at which a herd will be converted to A2 milk production depends on whether the strategy relies solely on use of A2 semen (the passive approach) or a more active strategy that requires testing all cows together with selective culling and calf retention. If farmers rely on the passive approach, and assuming that cows start milk production at two years of age, it will take 2.75 years subsequent to mating decisions before there is any impact in the milk vat. Thereafter, and assuming an initial A1:A2 ratio of 50:50, then the A2 proportion will increase each year by about 5 percentage units (e.g. to 55:45 once the first cohort of specially bred heifers enters the milking herd approximately three years after conception).
However, the rate of improvement gradually slows down (the relationship is asymptotic) and a herd will never reach 100% A2 without testing of cows. For farmers who start with A2 semen and then complete the process by testing cows and selecting only A2A2 replacements, the total process is likely to take about two cow generations, i.e. about 10 years.

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I want you to read the two highlighted bits in particular. The best case scenario with intensive management is that it will take ten years for a farmer to convert their herd, without any growth in herd numbers. Yet growth numbers for A2 milk spouted by investors on this forum have already priced in a 500% increase in A2 herd size in just two to three years. These growth numbers are so far outside of the reality of what breeding can achieve, I can only see the whole A2 investment thing ending in tears for investors buying ATM at today's prices. How can you invest in something when it is nearly biologically impossible to create the A2 milk volumes that the business plan needs?

Of course this isn't to say that the ATM share price won't go higher on market exuberance. But ultimately the market is a 'weighing machine', not a 'voting machine'. And the weigh in time for A2 milk is coming.

SNOOPY

[Beagle]

It seems expensive on fundmental's, current year PE is late 30's but I think they're building a great global business, (business's that build a great global franchise almost always seem expensive as they go up based on fundmental's so its definitely a case of watch the TA with this one) and am happy to keep holding as long as the technical's suggest its wise to do so. The other thing is I think we could see the currency move materially lower under the new coalition Government so there's tailwinds there in my opinion.

Tailwinds have been stronger than I expected over the last week. I remain of this view and am more than happy to let profits run...

Snoopy, you are right that it takes time to breed new herds. However - what we both don't know is how much A2-milk they currently sell as "standard" milk in these 25kg paper bags. I asked this question re A2 supply several times (during AGM's and in site visits) ... and while they never come up with hard figures (apparently commercially sensitive) the message is always that their A2 supply is lots.

As well - standard herds supply a mix of A1 and A2-milk. If you need more A2 milk, in the first instance there is no need to breed more A2-cows, but you just need to sort and separate your cows - and within days you can turn a large "standard milk herd" into a A1-milk herd (and keep selling the milk as standard milk) and an A2-milk herd (producing premium A2 product).

You don't need to breed - just two seperate paddocks and separate milking equipment for the two milk sorts.

It is not like A2 being something new ... many herds always supplied mainly A2-milk (e.g. Jersey or Dexter) and even most NZ high performance herds produce to roughly 50% A2. If you want to sell that as A2, than you just need to make sure you separate the A1-cows .... and this is just some testing and organisation .... no need for lots of (time consuming) breeding.

Obviously - over time you will want to move your herd to "pure" A2. Saves the time and effort to test (and if necessary separate) every new heifer.

Snoopy I thought we'd already debated this A2 cow supply thing to death. Its simply a matter of doing deals between farmers to sort the wheat from the chaff. There are literally thousands of dairy farmers out there who have wheat in their herd's who have huge debt legacy issues from the recent dairy price collapse who would be only too pleased to be on the receiving end of some "financial lubrication" to encourage them to swap some of their A2 type cows for A1 cows. The herds are not ready right away per se, but the supply is there nonetheless. No need to breed them, just let the hounds out and round up the good ones

[dobby41]

Thank you Snoopy - I didn't think it was 'easy' to bring A2 cows into the fold as the Beagle suggested.
Maybe he has a herd or 2 spare in his backyard?

[couta1]

Wishing I had more capital..lol

I've spent up big this week and not a cent on this stock, happy to get a big HLG dividend, the market has well and truly weighed that stock, hope A2 can tip the scales in line with it's very lofty pricing and expectation on it's next critical weigh-in, otherwise.

[RTM]

Tailwinds have been stronger than I expected over the last week. I remain of this view and am more than happy to let profits run...



Snoopy I thought we'd already debated this A2 cow supply thing to death. Its simply a matter of doing deals between farmers to sort the wheat from the chaff. There are literally thousands of dairy farmers out there who have wheat in their herd's who have huge debt legacy issues from the recent dairy price collapse who would be only too pleased to be on the receiving end of some "financial lubrication" to encourage them to swap some of their A2 type cows for A1 cows. The herds are not ready right away per se, but the supply is there nonetheless. No need to breed them, just let the hounds out and round up the good ones

And of course other countries such as USA may well get in on the act if the demand / price becomes attractive enough.

[Leftfield]

Like the Beagle, I doubt if the supply of A2 milk is an issue for the planned production increases.

1.) Would SML have invested in doubling its plant/production without ensuring adequate supply of A2 milk?
2.) There are strong indications that other NZ farmers are already positioning their bets on A2 and there is more supply waiting. Here's a pic of an article of a new north island A2 plant in the planning for 2018.
Attachment 9258
3.)In a 1 May 2017 article in Agri HQ reporter Paul McBeth noted, "A2 had (has) been taking less than half of the 200m litres of (A2) milk it had contracted from SML's farmers."

[see weed]

I've spent up big this week and not a cent on this stock, happy to get a big HLG dividend, the market has well and truly weighed that stock, hope A2 can tip the scales in line with it's very lofty pricing and expectation on it's next critical weigh-in, otherwise.

Same here, but sold HLG and others to get a2 for the last 4 weeks, and it paid off. Plenty of time to get back into HLG, it doesn't go ex div until 8/12/17, which is after the ATM agm.

[winner69]

9% up 2 weeks ago then 3% last week and 8% this week

Can’t ask for more

Say 5% next week and it’s over 9 bucks

And now only 16% away from 10 bucks - 2 weeks, no make it 3 weeks

[Snoopy]

Snoopy I thought we'd already debated this A2 cow supply thing to death. Its simply a matter of doing deals between farmers to sort the wheat from the chaff. There are literally thousands of dairy farmers out there who have wheat in their herd's who have huge debt legacy issues from the recent dairy price collapse who would be only too pleased to be on the receiving end of some "financial lubrication" to encourage them to swap some of their A2 type cows for A1 cows. The herds are not ready right away per se, but the supply is there nonetheless. No need to breed them, just let the hounds out and round up the good ones

While the cows might be there, it might surprise you to learn that the value of a cow is not solely dependent on its ability to produce A2 milk. Milk yield per cow is important. Temperament of the cow is important for handling purposes. The ability to give birth easily is important amongst other factors. To suggest that a farmer may be influenced to trade the cows he knows for others solely because the cows he wants will produce A2 regardless of all other factors is I feel wrong.

You say a farmer who is financially stretched may wish to trade cows to gain some capital at the expense of 'regressing' to A1 cows. But if the farmer is financially stretched, how are they going to afford to get the A2 test done to prove (some) of their cows are A2, when there is no guarantee those cows will be A2? Besides, are those farmers still financially stretched at today's milk prices? Why would a farmer voluntarily degrade their cow stock for the future when they didn't need to?

Finally have you ever heard of a farmer who has actually done this? Even one farmer? While I wouldn't dismiss your suggestion of 'rounding up the A2 cows' out of hand, I feel it is extremely unlikely to occur in practice.

SNOOPY