The a2 Milk Company Ltd (A2M.AX) was in 2018 the largest company on the New Zealand stock exchange. The company is a licensor and marketer of fresh milk, infant formula, and other A2 protein type branded dairy products. A2 milk is a variety of cow milk that mostly lacks the A1 beta-casein protein. Milk containing A1 proteins seems to have an adverse health effect, although research does not fully support this claim.[mepr-active membership=”1734″ ifallowed=”show” unauth=”message” unauth_message=”Please login or purchase a membership to view full text.”] The a2 Milk Company developed a genetic test that determines whether a cow produces A2 or A1 type protein milk. The test allows the company to certify A2 protein milk producers, which are then sold under the company’s ‘A2 Milk’ and ‘A2 Platinum’ brand names.
The a2 Milk Company is organized into business units based on geographical location. China and the rest of Asia is The a2 Milk Company’s largest geographic market segment accounting for 48 percent of the revenues and 47 percent of the profits. Australia and New Zealand follow with 47 percent of the revenues and even 59 percent of the profits. The US, The a2 Milk Company’s third geographic business segment, accounts for only 5 percent of the revenues. The US segment is in deficit but shows promising growth rates.
The a2 Milk Company was founded in 2000 and is headquartered in Auckland, New Zealand. The company is listed on the main board of New Zealand’s stock exchange since 2004 and has a dual listing on Australia’s stock exchange since 2015, where the stock is now traded in higher volumes. Its shares can be furthermore traded in Germany and the US. Major shareholder is Mitsubishi UFJ Financial Group Inc, with ownership of roughly 8 percent. The combined directors’ holding in the company is as little as 0.2 percent only. Eighty-nine percent of the shares are in public hands.
With over 136 employees, The a2 Milk Company reported revenues of 677m NZD (490m USD) and profits before tax of 177m NZD (128m USD) over the first half of its fiscal year 2020/21. This is a decrease of 16 and 34 percent respectively compared to the same period a year ago. For the full fiscal year 2019/20, revenues and profits increased by 33 and 31 percent, respectively.
The a2 Milk Company’s ‘Australia and New Zealand’ business segment dropped significantly over H1 2020/21, declining 31 percent in revenues and 48 percent in profit. This substantial decline results from the pandemic and a disruption of its so-called ‘daigou’ and reseller channels. Daigou has been a big shopping trend in Australia before the pandemic started. Chinese individual shoppers (Daigou), including students, tourists, expats, syndicated groups, purchased products – mainly luxury goods, groceries, and infant formulas – overseas to resell with a margin to customers in their home country China. This lucrative export channel has taken a big hit with the coronavirus outbreak and the following travel bans worldwide. It is a lot harder for customers to get these products to China these days.
Nevertheless, The a2 Milk Company’s operating margin of 29 percent remains still well above industry average. The company’s cash reserves have decreased by 9 percent to 775m NZD (561m USD), while lease obligations have increased slightly by 4 percent to 18m NZD (13m USD) over H1 2020/21 ending December 2020. The company has no other debts.
The a2 Milk Company shows a very robust balance sheet and still has good profitability and financial strength. The equity ratio is 85 percent, and the gearing, defined here as total liabilities to total equity, at a low 18 percent. Full-year earnings results will be announced at the end of August.
The a2 Milk Company’s share started an impressive rally in 2016, with value increasing ninefold at its peak in June 2020. Since then, the share price has been in a downtrend and has lost more than 70 percent, over 50 percent alone this year. The company is currently priced at 12 times earnings, three times book value, and 15 times operating cash flow. The a2 Milk Company does not pay dividends. Only one out of 7 covering analysts still has a ‘buy’ recommendation on the stock. The mean price target is 7.66 AUD.
Our conclusion: The a2 Milk Company shows a strong balance sheet with good profitability and financial strength. The valuation has reached reasonable levels and comes with a compounded annual growth rate for revenue and profits of 57 and 145 percent, respectively, over the last five years. The outlook for the A2 milk markets is positive, with an expected growth rate of more than 10 percent annually over the next five years.
The a2 Milk Company possesses strong brands and is well-positioned in an increasingly competitive environment. The impact of the pandemic and several consecutive analyst downgrades should be sufficiently reflected in the current share price. The company’s liquid funds are sufficient to pursue future expansion plans. Assuming a stable global economy, we expect the share price to increase by at least 15 percent until the end of this year.
AIS Rating: ★★★★☆
| 2015/16 | 2016/17 | 2017/18 | 2018/19 | 2019/20 | 2020/21 H1 only |
|
|---|---|---|---|---|---|---|
| EPS (NZDcents) | 4 | 12 | 26 | 39 | 52 | 16 |
| Change (%) | (1447) | 185 | 114 | 47 | 34 | (35) |
| DPS (NZDcents) | n/a | n/a | n/a | n/a | n/a | n/a |
| P/E | P/E INDUSTRY |
P/B | P/CF | Equity Ratio* (%) |
ROE (%) |
LIAB./ Equity** (%) |
Div YLD (%) |
|---|---|---|---|---|---|---|---|
| 12 | 20 | 3 | 15 | 85 | 29 | 18 | n/a |
* Equity / Total Assets, ** Total Liabilities / Equity
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