a2 Milk Presentation & Outlook – Was There Illegal Insider Trading?

As an investor I’m feeling a bit miffed, to say the least – as, it seems, is the ShareTrader community.

Lewis Hurst

On the 19th of August 2020, a2 Milk (ATM) released an investor presentation covering the previous year and the following year’s outlook (guidance). Rather than give my interpretation of that outlook, I’ll paste it directly for you to read here:


• Globally, there continues to be uncertainty resulting from COVID-19, and the potential for moderation of economic activity. This could impact consumer behaviour in our core markets, as well as participants within the supply chain, most notably in China
• Notwithstanding these uncertainties, overall for FY21, we anticipate continued strong revenue growth supported by our continued investment in marketing and organisational capability
• FY21 EBITDA margin is expected to be in the order of 30% to 31% reflecting
‒ Higher raw and packaging material costs partially offset by price increases
‒ Increase of marketing investment
‒ FX benefit of prior year not expected to be replicated
‒ 3Q20 COVID-19 benefit not replicated
• FY21 Capex is currently expected to be $50 million due to our ERP investment and capital projects supporting fresh milk processing in Australia

Medium-term target

• As previously announced, the Board considers it appropriate that the Company target an EBITDA margin in the order of 30% in the medium-term.
This assumes the market performance and mix of our products remains broadly consistent and the competitive environment evolves as anticipated. We will keep the balance between growth and investment under constant review

This outlook comes on the tail end of a very positive presentation, with highlights such as:

• Total revenue of $1.73 billion, an increase of 32.8%
• EBITDA of $549.7 million, an increase of 32.9%
• Net profit after tax of $385.8 million, an increase of 34.1%
• Basic earnings per share (EPS) of 52.39 cents, an increase of 33.5%
• EBITDA to sales margin of 31.7%
• Operating cash flow of $427.4 million and a closing cash balance of $854.2 million
• Marketing investment of $194.3 million targeting opportunities in China and the USA
• Group infant nutrition revenue of $1.42 billion, up 33.8%
• China label infant nutrition sales more than doubling to $337.7 million and distribution expanded to ~19.1k stores
• USA milk revenue growth of 91.2% and distribution expanded to ~20.3k stores

Those figures “are with the 12 months ended 30 June 2019 (FY19)”, which includes 6 months of China enduring the Coronavirus infection.

Given this, I understood the outlook to be positive, as the company seemed performant throughout the year despite Coronavirus, increasing revenue by 32.8%. The outlook said that “…Notwithstanding these uncertainties, overall for FY21, we anticipate continued strong revenue growth…”.

Following this positive presentation on 19/8/2020, there was a director sell off of shares through to 27/8/2020. Nine working days later, on 09/09/2020, there was an investor presentation that parroted much the same information as the last presentation, but with a slightly amended outlook:

Current observations
• Unwind of 3Q20 pantry stocking in the early part of FY21
• Softness in retail daigou continuing due to reduced tourism from China and international student numbers
• Some disruption being seen in the corporate daigou / reseller channel resulting from Stage 4 lockdown in Victoria

It’s difficult to know if the directors were insider trading on this knowledge prior to release or if this was just normal trading. A clue might be in the dates that Victoria went into lockdown vs when the directors sold their shares. According to Wikipedia, Victoria went into lockdown on 06/08/2020, which is before the presentation saying that everything is good, before the directors started and finished their selling, but after the presentation suggesting that there were problems.

So, to answer the titular question of this article: Was there insider trading from the directors? Well I can’t say that there was or was not, but I think there’s probably enough evidence to suggest that an investigation should be done. Perhaps the NZSA might consider kicking off such an investigation? Perhaps their analysis suggests that it’s probably not insider trading? Or perhaps all the larger holders have decided that it is what it is and they’d rather have the directors focusing on the business than defending themselves in a legal battle and risk losing some otherwise good management?

Stay tuned for a summary of the new outlook, summary of the investor call, and a resulting valuation to see if it’s worth buying ATM at these reduced prices…


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