ATM - A2 Milk Corporation Limited

**MAC** · 15-01-2014, 07:28 PM

Originally Posted by muss1

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.

I think Snoopy is enjoying winding you up Muss, last year he reckoned 60c was grossly overpriced and 20c was fair, I’m not sure that worked out too well for him either, I’d also be buying quite a lot at 20c actually, but alas dreams and unbridled optimism may be free but don't make you money. Post 600 or thereabouts for the pilot to this sequel.

**muss1** · 15-01-2014, 08:12 PM

Originally Posted by MAC

I think Snoopy is enjoying winding you up Muss, last year he reckoned 60c was grossly overpriced and 20c was fair, I’m not sure that worked out too well for him either, I’d also be buying quite a lot at 20c actually, but alas dreams and unbridled optimism may be free but don't make you money. Post 600 or thereabouts for the pilot to this sequel.

i remember that... Didn't realise it was him though. I can't be wound up here, very happy with how things are playing out with ATM. I just hope couta gives it the consideration that others have and he might be pleasantly surprised

**couta1** · 15-01-2014, 10:26 PM

Originally Posted by muss1

i remember that... Didn't realise it was him though. I can't be wound up here, very happy with how things are playing out with ATM. I just hope couta gives it the consideration that others have and he might be pleasantly surprised

Hi Muss, Thinking about it and have read article on lab test results of product in the mice experiment etc,will their next financial be a half yearly one in may? I noticed they made a loss in the November report last year, currently selling at 90c having hit 93c, is 90c a reasonable entry price, not sure if it will go much lower.cheers

**couta1** · 15-01-2014, 10:38 PM

Whoops that was the last Reuters report I was reading which was updated in November showing losses

**Snoopy** · 16-01-2014, 10:16 AM

Originally Posted by MAC

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.

The key phrase is not 'cashflows' MAC, but 'net positive cashflows'. Last year ATM generated $3,647m of positive operating cashflows. But they also used up $5.830m in investment cashflows. So the net cashflow position of ATM for FY2013 was actually strongly negative. No surprise there for a company in its establishment phase.

The goal of $280m in sales by December 2016 is exactly that. The current strategy of realigning their partnership in the UK, such that A2 takes full control of marketing is probably the correct one. But short term I expect that to be strongly cashflow negative for ATM. It is hard to get direct parallels. But look at Fonterra's annual report, and in particular the segmented result on Asia.

I picked Asia because that is also a growth market for A2, and despite the establishment of farms in China the Asian operations of Fonterra are largely a marketing division, as per the A2 model. External revenue is $2,057m. Selling and marketing expenses of $324m, which equates to 15% of turnover. So we could use a bit of ratio analysis to suggest that on $280m of sales ATM might need to spend $280m x 0.15 = $42m annually just to maintain their market position. Establishing a new product is likely to be more expensive than that.

I put it to you that A2 can in no way afford these kinds of costs and if $280m in gross sales is indeed the plan they are still desperately short of capital. That means another heavy issue of shares to new investors, diluting existing investor returns or a large rights issue. Remember when they tried this exercise a few months ago the most the institutional investors would pay was 50c per share. Why just a few months later do you expect those same investors would be looking to pay nearly twice that for new shares?

I put it to you that your cashflow analysis has not properly considered the realistic marketing and establishment costs that A2 will face.

SNOOPY

**MAC** · 16-01-2014, 11:06 AM

You know the forward market for ATM is huge, Europe, Scandinavia, Canada and the US are yet to be tapped. They are only just beginning with China too. One could be forgiven for appreciating that there may well be 10 years or more of continuous forward growth for ATM.

Their revenue goals look fine to me at FY16 $280M and as the prospective market seemingly appears almost infinite from this point, in all probability, heaven forbid a takeover, this is just the beginning of something that could be big.

That forward goal represents a revenue growth rate of around 43%pa, and I see no reason why that growth rate is not sustainable well beyond FY16.

Add to that equation the established 50% price point premium, the 35% gross margins, and ATM’s high reinvestment rate, ……, we will see a lot of forward cashflows.

The more cash ambitiously reinvested now by ATM the greater those cashflows will be.

I’m also impressed actually with ATM management in consistently maintaining a positive balance sheet whilst investing so heavily in growth, that takes very good fiscal control and restraint and not all companies do this well. No capital raising's or dilution required here.

ATM Revenues.jpg

**Snoopy** · 16-01-2014, 11:42 AM

Originally Posted by MAC

You know the forward market for ATM is huge, Europe, Scandinavia, Canada and the US are yet to be tapped. They are only just beginning with China too. One could be forgiven for appreciating that there may well be 10 years or more of continuous forward growth for ATM.

Their revenue goals look fine to me at FY16 $280M and as the prospective market seemingly appears almost infinite from this point

Mac, I can now see where you are coming from. If you believe there really are no limits to ATMs growth then you can justify any share price, and what you pay doesn't matter. For you, there is no need to bother with any fundamental analysis from this point. From my point of view ATM is in a bubble, from an investment perspective. Note this is not the same as saying I don't believe that ATM will be able to execute their operational plans. Unfortunately for you, because you are on inside of that bubble, you cannot see it.

That forward goal represents a revenue growth rate of around 43%pa, and I see no reason why that growth rate is not sustainable well beyond FY16.

The reason is that almost all of this growth will be coming from new markets. Granted, given their record in Australia ATM has the best possible chance of success. But other markets have different dynamic and bureaucratic hurdles. The idea that ATM can simply roll out their Australian machine in all markets globally is naive.

Add to that equation the established 50% price point premium,

The price point premium must be earned by growth prospects. It is not an automatic right as you believe.

the 35% gross margins, and ATM’s high reinvestment rate, ……, we will see a lot of forward cashflows.

Mac, the 35% gross margins provide the fuel for the growth engine, true. But the high reinvestment rate consumes all of the cashflow. So you have contradicted your own argument. Net cashflow is negative and will continue to remain so for a long time.

The more cash ambitiously reinvested now by ATM the greater those cashflows will be.

No it has to be 'effectively invested', not 'ambitiously invested'. Ambition on its own is insufficient for success.

I’m also impressed actually with ATM management in consistently maintaining a positive balance sheet whilst investing so heavily in growth,

They are maintaining their balance sheet by organizing large capital raisings! Have you forgotten the capital raising of late last year already?

that takes very good fiscal control and restraint and not all companies do this well.

I do give ATM top marks for their ability to grow their funding base. That doesn't mean I would be keen to pay twice the price the big boys agreed to for future funding though.

No capital raising's or dilution required here.

You are kidding right? ATM will fail without more capital.. Add on the head office costs and it doesn't even make a profit in Australia yet.

SNOOPY