This report is the updated version of the report uploaded on 23 November 2022 at 4:56 PM GMT +13.

The a2 Milk Company Limited

ATM Details

The a2 Milk Company Limited (NZX: ATM) is engaged in the branded milk business and produces from cows with only the A2 protein type.

Financial Results for FY22

• The company has posted a 19.8% growth in revenue to NZD1,446.2 million (11.2% ex-MVM), with China label and English label IMF sales growing by 12.2% and 11.6%, respectively
• EBITDA (or Earnings before interest, tax, depreciation and amortisation) increased by 59.0% to $196.2 million, underpinned by higher revenue and gross margin.
• Net profit after tax, including amounts attributable to non-controlling interests, rose to $114.7 million, up 42.3%, with $122.6 million attributable to owners of the Company

Key Updates

• On 10 November 2022, the company appointed Chopin Zhang as Chief Supply Chain Officer to look after the company’s end-to-end supply chain in all categories and markets
• On 3 November 2022, ATM mentioned that it bagged the United States (US) Food and Drug Administration (FDA) approval to supply infant milk formula to the United States

Outlook

The outlook for FY23 remains positive as the company expects a high single-digit revenue growth and an improvement in EBITDA margin. The gross margin percentage in FY23 is estimated to remain largely in line with FY22, as the benefits of price increases, mix benefits and cost mitigation initiatives are likely to offset cost pressures.

Key Risks

The company is exposed to the risk of intensifying competitive intensity that could erode its market share position in core markets. It is also exposed to various risks associated with changing macro trends, the regulatory environment changes, commodity prices change, and fluctuations in foreign currency exchange rates.  

Valuation Methodology: Price/Earnings Per Share Based Relative Valuation (Illustrative)

Stock Recommendation

Over the last 6 months, the stock has given a return of ~+40.25%. The stock is trading below the average price of 52-week low-high range for the stock at NZD4.20-NZD6.74, respectively.

The stock has been valued using P/E multiple-based illustrative relative valuation, and the target price so arrived reflects a fall of low double-digit (in % terms). A slight discount has been applied to P/E Multiple (NTM) (Peer Average), considering the challenging China IMF market, broader industry and business risks, and the current trading levels.

Considering the current trading levels as well as risks associated, it is prudent to liquidate the stock at the current levels.

Hence, a ‘Sell’ rating has been provided on the stock at the current price of NZD6.72 per share as of 23 November 2022 (New Zealand Time: 12:37 PM (GMT +13)).

Technical Overview:

Daily Price Chart

Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: Past performance is neither an indicator nor a guarantee of future performance.

Note 2: The reference date for share price chart and stock valuation is based on November 23, 2022, and all other data such as stock price performance as of November 24, 2022. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Disclaimer

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