Price Check On a2 Milk

It’s been a while since I ran the numbers on ATM and declared it as a good buy. The Market Capitalisation (MC) has since increased, and with the dwindling share price over the last couple of days I thought that it’s probably time to do a price check on a2 Milk to see if it’s still a buy, given todays share price.

Over all, the ATM share price has gone up since I last analysed ATM’s 1H20 (1st Half of 2020) result on the 4th of April, and the MC now sits at $15,418m. Since that date, there has also been a trading update and FY20 Outlook been published. This gives me the opportunity to fill in some blanks and update my speculation based on the guidance provided.

There is no guidance on FY20 NPAT (which is my prefered number to measure value on), so I will have to guestimate this based on the number we do have in the FY20 Outlook.

Based on the 1H20 result, I previously estimated that annual NPAT for FY20 would be $370m (double 1H20 NPAT). Applying the same logic to the 1H20 revenue, one can extrapolate that I had expected FY20 revenue to be ~$1,600m. The new guidance states that due to a number of factors in ATM’s favour, guidance is ahead of their previous predictions and now sits at $1,700m with an EBITDA margin of 31% to 32%.

I’m not feeling in the mood to dig around to try to guesstimate their EBITDA to NPAT ratio, so I’ll assume that NPAT is 23% of revenue (based on the 1H20 results of ~$185m NPAT to ~$807m revenue).

If we say that FY20 NPAT is 23% of $1,700m revenue, that gives a figure of $391m. Based on my last guess of $370m NPAT and adding 23% of the additional $100m revenue ($1,700 from the FY20 Outlook, minus my estimate of $1,600m) that gives an estimated NPAT of $393m ($370m + $23m). Both methods line up pretty well, so I have a high level of confidence in my guess of NPAT against revenue, which I can use in my modelling.

However, there is some other news that will affect NPAT since my last analysis. ATM have been looking into acquiring a manufacturing facility. For the purpose of modelling, I will ignore this because I have no guarantee that it will happen, no way to model return and I’m happy to assume that such a purchase would be earnings acreditive (otherwise they wouldn’t do it) and therefore any reduction in NPAT would simply be shareholder value in another form.

So, given an NPAT of $392m (splitting the difference between my two NPAT calculations of $391m and $393m), and a current MC of $15,418 minus cash in the bank (let’s assume the $620m from 1H20 + $80m for the quarter [annual NPAT divided by 4]), that gives a ratio of 37.5 for a company growing at a rate of 20% pa.

I now consider a2 Milk to be slightly expensive. I expect this new pricing has come about since ATM’s inclusion into the S&P/ASX50 Index. My preference would be to see these priced closer to $19.50 per share to be in my buying range, though no doubt they will increase in value over time, I just feel that they are currently slightly overpriced for the return I would have liked to see.


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