ATM - A2 Milk Corporation Limited

[MAC]

I never recommend basing investments on an evaluation of single metric like PE, we really need to look at the full business model and the forward discounted cashflows to see the big picture of a going concern.

ATM have a high PE for a very positive reason;

They sell A2 products that demand a price point premium 50% above their A1 competition yet the farm gate sale price of A2 milk is only 8% higher than A1. This provides for consistently higher gross margins than the A1 industry, as per comparison with SML and FSF below.

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Over the last 2-3 years the company has grown both very quickly and at a relatively uniform rate, they have pumped all that cash generated from those high gross margins straight back into growth and this is why net margins and NPAT have been consistently subdued and thus why the PE consistently high.

Think of it as an extremely high rate of re-investment that will show as an even greater return downstream. Perhaps to your point, one of the highest re-investment rates in the NZX.

Recommend a look at forward free cashflows and a DCF valuation for a clearer picture.

[muss1]

Agree with MAC. A quick look at the financial statements would show that the PE is only high because of one off costs. Granted these one off costs might reoccur while ATM continue their growth aspirations in new markets

[warthog]

No ATM can't go down to zero. As long as there are projected profits and or positive cashflow the share will always retain some value. If you really think it could go down to zero, you don't understand how the sharemarket works.

SNOOPY

Why thanks Snoopy.

And if there are no projected profits and/or positive cashflows?

Potentially all investments can become worthless.

[couta1]

Thanks Snoopy for your helpful reply above, seems paying over 90c for the stock at the moment is a premium price to pay.

[westcoaster]

http://keithwoodford.wordpress.com/c...1-and-a2-milk/ The science is what I believe gives this stock its value.

[muss1]

Thanks Snoopy for your helpful reply above, seems paying over 90c for the stock at the moment is a premium price to pay.

I wouldn't dismiss ATM as too expensive just because of what snoopy has said (all due respect). Consider what others have said also and have a bit of a dog below the surface yourself. The reported PE is deceptive in this case. When I calculated it for myself a few months ago ignoring establishment costs etc it painted a much better picture and was more inline with expected growth. Not as expensive as it first may seem. The SP has risen substantially since then, but half a year of sales has passed as well

[mrjeems]

I wonder if the Cabana bar uses A2 milk for their white russians...

[Snoopy]

I wouldn't dismiss ATM as too expensive just because of what snoopy has said (all due respect). Consider what others have said also and have a bit of a dog below the surface yourself. The reported PE is deceptive in this case. When I calculated it for myself a few months ago ignoring establishment costs etc it painted a much better picture and was more inline with expected growth. Not as expensive as it first may seem. The SP has risen substantially since then, but half a year of sales has passed as well

Thanks for the challenge Muss. I have decided to look at the AT2 annual report for the year ended 30th September as you suggested. Particularly the income statement on page 10.

Removing the one off exchange rate loss we are looking at a normalized after tax profit of $4.12m. There is a joint venture loss of $3.719m to contend with. That seems to be related to the 50% owned joint venture A2 milk UK limited that according to KW has now been dissolved. But if A2 want to progress in the UK they will now have to spend their own money instead. So I don't think you can call the $3.719m lost a one off, when the market is clearly not yet profitable.

All the other expenses seem to be ongoing. I had thoughts of taking out the strategic review. But it looks like ATM have a strategic review every year! So we are back to a normalized profit of $4.12m.

With 617.2m share on issue I get 'eps' of :

$4.12m / 617.2m = 0.6675cps

With the share price at 90c, I get an historic PE of 135.

So ATM looks to be even more expensive than I thought.

SNOOPY

[MAC]

Thanks for the challenge Muss. I have decided to look at the AT2 annual report for the year ended 30th September as you suggested. Particularly the income statement on page 10.

Removing the one off exchange rate loss we are looking at a normalized after tax profit of $4.12m. There is a joint venture loss of $3.719m to contend with. That seems to be related to the 50% owned joint venture A2 milk UK limited that according to KW has now been dissolved. But if A2 want to progress in the UK they will now have to spend their own money instead. So I don't think you can call the $3.719m lost a one off, when the market is clearly not yet profitable.

All the other expenses seem to be ongoing. I had thoughts of taking out the strategic review. But it looks like ATM have a strategic review every year! So we are back to a normalized profit of $4.12m.

With 617.2m share on issue I get 'eps' of :

$4.12m / 617.2m = 0.6675cps

With the share price at 90c, I get an historic PE of 135.

So ATM looks to be even more expensive than I thought.

SNOOPY

I think you may find that those costs are for JV establishment, and as the company grows we should look forward to many more joint ventures costs in Europe and the US as ultimately these investments will generate rather enormous cashflows.

Snoopy, valuations are based on forward free cashflows, do have a go at a DCF, based on the ATM goal of achieving $280M in FY16 revenues and growth ambitions beyond, you may find like many others that ATM is looking satisfyingly quite undervalued at $0.90

Investigation research and analysis reaps rewards.

[muss1]

Thanks for the challenge Muss. I have decided to look at the AT2 annual report for the year ended 30th September as you suggested. Particularly the income statement on page 10.

Removing the one off exchange rate loss we are looking at a normalized after tax profit of $4.12m. There is a joint venture loss of $3.719m to contend with. That seems to be related to the 50% owned joint venture A2 milk UK limited that according to KW has now been dissolved. But if A2 want to progress in the UK they will now have to spend their own money instead. So I don't think you can call the $3.719m lost a one off, when the market is clearly not yet profitable.

All the other expenses seem to be ongoing. I had thoughts of taking out the strategic review. But it looks like ATM have a strategic review every year! So we are back to a normalized profit of $4.12m.

With 617.2m share on issue I get 'eps' of :

$4.12m / 617.2m = 0.6675cps

With the share price at 90c, I get an historic PE of 135.

So ATM looks to be even more expensive than I thought.

SNOOPY

Yes I think it was an establishment cost rather than a reoccurring cost of operating in the UK as MAC has said below. So I still think you can almost double the EPS. Granted that still gives a high PE, but there are great prospects as well. If you use the peter lynch PE=growth it looks scary but this one deserves more investigation.