How Far Will The ATM Share Price Fall?

Thought I should pull my finger out and do a little analysis on this to see how bad it could get, since I had half an hour free…

Looks like H1 NPAT is $120m, lets assume FY will be $240m (double H1). I know they’re predicting more in their guidance but those predictions are based on COVID going away, which I don’t want to rely on.

Assuming no growth, they might be worth a PE of (at most) 20 (though I think market sentiment could at times demand a lower rate as long as news isn’t good). I won’t speculate at what a lower ranged PE might look like because there’s no way to know where the market’s head is at.

A PE of 20 gives a market capitalization (MC) of $4.8bn (20 x $240m). Adding $775m cash on hand gives a MC of $5.57bn.

Unfortunately the recent milk plant purchase will reduce that number because they’ve said it will be unprofitable/break-even until FY24/25ish. I don’t remember how much they paid for it, but I have a number of $200m in my head for some reason. Let’s use that since I’ve run out of time.

That gives an upper MC of $5,375m at this stage (that’s a share price of $7.23), though this upper limit would go lower on any bad news (or if cash reserves dropped). Implicitly, but for clarity, I expect the ATM share price to fall to at least $7.23, then trade somewhere below and up to that price until there is evidence of a turnaround. I hold in the hope that post COVID, this company can once again be great, but am not investing more money as it’s not running as I would like to see it run (also it no longer fits my strategy).


More Headwinds For a2 Milk

ATM have had a bad run of late. After suggesting that all is well, followed by a mass sell off of shares from the board of directors, the board then declared that the situation was not too clement for ATM’s milk sales.

Despite the directorate touting the collapse of the Daigou market as the reason for a drop in sales, I can’t help wonder if increased competition lending itself to lower margins has assisted recent failings in profit.

Despite this I held my position with the view that ATM will recover post covid19. I accept that the playing field is now different with competition appearing, but competition is normal in business, and the share price had already fallen to a level that accounted for this. Besides, it’s a growth market with plenty of room in China for many players in MBS alone. Also ATM have other things going on in their growth plans such as the move into milk processing which I think derisks the business. I’m a big fan of vertical growth for companies that are big enough to swallow the entire output of upstream production, because although initially expensive and risky due to lack of inhouse experience, vertical growth derisks business in multiple ways, and offers an avenue of growth.

That aside, there is now a new problem emerging, which suggests that the Daigou market may not return post vaccine as I had expected. (Probably rightly so, given the racial issues that were reported) China appears to be urging students not to apply to Australian universities. This is a big problem for ATM because it’s believed that Chinese students make up a big part of the Daigou market.

Personally I’m not going to sell my shares on this news, mainly because I can’t bare crystallizing my losses at this price (which I acknowledge is a really bad way to think), but also because doing so doesn’t effect my long term strategy and I’m willing to wait to see how the company is in 5-10 years time.

That said, with all that’s gone on and what’s to come, I am not a happy shareholder and won’t be buying more ATM shares (not only because it doesn’t fit my strategy for retirement income in the near term).


Thinking About Buying ATM Shares?

If you’re thinking about buying ATM shares right now, beware.

While ATM shares may seem attractive based on a price to earnings view, there are some disparaging signs that make them less attractive. Specifically today’s data from Stats NZ showing that “New Zealand’s biggest goods export, dairy products, fell $377m (19 percent) in December 2020, compared with the same month in 2019”.

I’m not saying that this makes ATM a bad buy, just that anyone considering buying ATM shares should consider this in their analysis.

It’s important to note that I’ve not done any analysis on whether ATM is a buy right now, because as previously mentioned in my other articles, I plan to retire soon and need to invest in stocks that pay dividends now, not in 10 years time (though it may transpire that I will have room in my portfolio for such a stock next year, depending on how things go).

If I were to do any analysis, I would be modelling results based on MBS and CBEC growth with recent evidence considered, then if that was unfavourable (or if I was managing a portfolio with a risky element and looking for higher gain), I would model how the price would look post-COVID. This model would be a DCF style analysis and would have a significant risk premium in consideration.


A Bob Each Way

Given all that’s going on, I’ve been thinking about what’s the best way to invest. I noticed in my portfolio that there are some shares that benefit from the Coronavirus situation, and some that would benefit if it went away. Since enough time has passed that companies have released announcements covering periods operating under Coronavirus, it’s fair to say that companies that are coping under Coronavirus have had their share price correctly revalued with respect to this, and that being rid of Coronavirus would would only sent their value upwards.

Therefore putting a bob each way, or hedging an investment in a company that’s benefiting from Coronavirus with an investment in one that would benefit from its riddance could prove a good investment under all scenarios. So I thought it might be fun to make a list of pairs of stocks could collectively be good investments.


This is an obvious one. FPH has been selling humidifiers (which improve the performance of ventilators – required by Coronavirus patients) faster than they can make them and the share price looks like it could double under another year of Coronavirus. In the event of Coronavirus being eradicated, FPH may return to their normal growth trajectory (15% pa), though there’s a risk of dropping back closer to pre-Coronavirus levels if new buyers of humidifiers fail to see value / demand in their continued use. That said, this wouldn’t be the worst thing if (like me) you see FPH as a bond proxy and don’t mind the 1% dividend in a solid company.

ATM has recently had their share price ravaged as the lack of Chinese people (tourists, students, etc.) travelling from Australia caused the Diagou market to dry up. A cure in Australia & China could see the ATM share price double within a year. It has to be said that there is also downside risk from the current Australian-Chinese relationship.


Speaking of the current poor relationship between Australia and China, I think ATM & DGL could be another good pair for my list. If China bans Australian wine imports, this could be good for DGL who export a lot of their wine to China and might enjoy a lack of competition in the australasian arena.

I had thought that DGL exported a lot of wine to China because I remembered reading that on a share forum. Upon investigation, it seems that only 22% of their products are sold to Asia/Pacifica.

What other pairs can you think of?


What Are ATM Shares Worth Now? (Updated)

After listening to the recent Investor Call, and reading the Updated FY21 Outlook, I still feel unequipped to value ATM shares.

Despite recent COVID19 setbacks ATM is still a growth company and therefore should be valued based on forward earnings. However I don’t feel confident in the numbers provided in the updated outlook for FY21, because I felt that I picked up a little contradition between Geoff and Peter in the investor call, with regard to H2 speculation in the updated figures. This is not a slight against the directors, rather a comment on the fact that it’s all a bit of a guess on something that’s out of ATM’s scope of control.

Therefore any number I place on the value of ATM would be a guess. That said, lets look at the market’s guess on the value and see what assumptions might give rise to such a guess.

The current share price is basically exactly as it was this time last year (albeit slightly higher). Clearly the market pricing is based on statements in guidance that there will be no revenue growth – and assumptions have been made that there is no revenue decline.

Looking further ahead, ATM’s sales infrastructure isn’t damaged (other than the current, temporary Daigou situation). One could expect that growth should be quite significant once COVID19 issues are gone. This probably explains the slight upside on last year’s price.

So, is ATM a buy right now?

Well it’s a bit of a gamble on whether COVID19 will be cleared up (in Australia) by the end of H1 or early H2. Personally I’ve found that when I’ve gambled in the past, it’s always caused me to underperform my average and I’m better off trusting my calculations. Consequently I probably won’t be increasing my holding at this reduced price – but I certainly won’t be selling.

My current strategy is to hold, and wait to see if the existing sales channels that ATM have established ensure a fast recovery in sales once everything finally clears up (this year or next!). However, my position is somewhat hedged by my holding in FPH, which massively benefits from the COVID19 situation. Given that, I may buy more ATM shares if the price falls on news (good or bad), announcements are made that suggest that things are improving and if the price remains static, or if the COVID19 situation in Australia seems to be improving before H2.


After having a bit of time to think about it, given the fervor from ATM’s investors and the fact that they should return to a similar size of sales after COVID19 issues are resolved, I expect that the share price should steadily creep upwards from it’s recent lows. In the event that things become more dire in Australia (in terms of a sustained lockdown), I expect the share price will dwindle and then return towards following the same pattern.


a2 Milk Investor Call Summary

For your convenience, I thought I’d summarise the a2 Milk Investor Call held after, and with regard to the market shocking Updated FY21 Outlook.

Opening Statements

The meeting started off with Geoff Babbage saying that they had hinted at the softening Daigou channel prior to the announcement, and then went on to say that they had not expected such a significant and extended lockdown in Australia.

They expect a soft first half year with no growth, and they expect this to be temporary if COVID19 issues stabilize in Australia.

Geoff then spoke about previously announced performance, saying that other parts of the business are performing strongly. China label up 77% on pcp. Mother and Baby Store (MBS) share increased significantly in August, with the MAT (which is a large market) share increasing from 2% in June to 2.2% [in Q4?].

Plans always assumed a better H2, especially FY21 – more so that previous years.

Inventory peaked in July, as they planned to build inventory for contingency of production issues. They plan to reduce cover over FY21.

Questions And Answers

JP Morgan opened the Q&A by asking how much they expected Daigou business to be down based on H1. Geoff told him that shareholders need to work their own assumptions out themselves, that the Daigou is an important part of ANZ sales, and that they’ve already given guidance on total revenue. He basically refused to answer the question.

JP Morgan then asked how they managed to improve EBITDA margins in their forecasts. Discretionary spending, marketing spend on things like outdoor activities, stock provisions, etc. enabled them to slightly lift margins from 30% to 31%.

Forsyth Barr asked if the change in guidance only had changes to H1 factored in. Geoff said that H2 guidance hasn’t changed very much, but assumes higher China direct sales and [lesser?] Diagou sales.

Forsyth Barr then asked what they’re doing to reroute the supply chain. As I understood, Peter (?) inferred that Daigou inventory wasn’t specified to that channel as it’s just stock that people buy in shops, therefore it can’t be rerouted. He then said that they’re redeploying funds for incentive programmes for Daigou’s.

Wilsons asked if their corporate Daigou was building inventory in H2 FY20, as the half didn’t suffer from Daigou issues when other peers were. Peter commented on pantry destocking.

Wilsons then asked if the lingering effect of COVID19 was factored into H2 FY21. Geoff said that they’re assuming there’s an improvement.

UBS asked about performance in the direct seaback channel. Geoff referenced an inventory issue, which is now being released but there’s a delay. Peter said they were pleased with seaback shares.

UBS asked if they were seeing inventory build for those customers. Peter said that it happens next month.

UBS asked if the pricing strategy will chance. Peter (?) said that pricing wasn’t changing.

Bank of America asked the directors to verify that the directors selldown wasn’t insider trading. Geoff said it was all above board and they only just came to the view of the change in guidance at the weekend, but have been thinking about it for a few weeks.

Bank of America then asked if it was just a problem in the Daigou. Geoff said it’s Daigou and pantry destocking, as previously mentioned.

Morning Star ask if consumer behaviour in China is changing. Peter said that the brand was strong.

Morning Star asked if there will be a rebound in H2 or if it will go down. Peter (?) said it was a hard one to guess if there would be a significant restocking, but said they were factoring in that there will be softness in Daigou in H2.

Jardens asked what the strategy was going forward. They said that they will carefully manage inventory into channels.

Jardens asked about the separation of the sales channels. Peter basically said that all is well.

Macquarie asked about how one channel knocked the whole business. Geoff (?) said that customers of the Daigou channel may switch to another brand.

Macquarie repeated Morning Star’s question about whether there will be a rebound in H2. They said that the updated guidance expected a bit of a restock, but not as much to cover the whole year.

K2 Asset Management asked if a buyback was on the cards due to the reduced share price. A2 said that capital allocation was purely for growing the business, not buying back shares.

Morgans asked how FY21 H1 might look. A2 said that EBITDA (margin?) across H1 and H2 to be steady.

Morgan Stanley asked if there was increased competition from the change to the Daigou and info on MBS. They said they weren’t seeing anything in Daigou. a2 would not give any info on the number of MBS stores stocking product.

Closing Remarks

The closing remarks from Geoff were that they didn’t expect this and that they have been transparent in their announcements. He reiterated that the Daigou channel issues will be temporary and the other aspects of the business are strong.


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…


I Think I Might Have Got To The Bottom Of Why a2 Milk’s Share Price Fell

First of all, my apologies for not writing sooner, I’ve been knocked out with a doozy of a cold shortly after writing my last article. I’m still sick, but wanted to get this article done before the automated mailer goes out to my subscribers today at 13:00.

Lewis Hurst

Twelve days ago I wrote an article speculating why a2 Milk’s share price fell after a great results announcement. In the article, I speculated that investors could be hedging against risks that China had started blocking imports or that there were quality issues extending beyond what was said in the annual shareholder meeting, but ended up concluding that “…there is an element of pure market force in the ATM share price…”, and even if there were quality issues things would be back to normal soon. As a result, I topped up my ATM holding, which I stated at the end of the article.

After more consideration and research, I think I might have got to the bottom of why the share price fell. It’s something that’s been plastered all over various sharetrading forums, but something I was nervous to accept due to the timing of other events.

In short, I believe that the share price fell because insiders were selling, and this (and nothing else) spooked investors and created market forces pushing the price down.

The reason I say that, is because looking back at historical records, the share price always falls around this time, which is always after insiders start selling, and they always start selling after the results announcement, which was always a good announcement.

I feel almost embarrassed by the simplicity of this and not drawing this conclusion earlier, but the timing of the news of quality issues was too compelling. Specifically, if a director wanted to weasel his way out of a shareholding at the peak of the share price because there was an impending business destroying event, that’d be the best way to do it – give a great results announcement, sneak the news in at the end (to fulfill the legal obligations of not trading on undeclared inside knowledge), then sell like crazy.

I don’t believe this is the case, because selling is in line with prior year’s selling, and the share price has dropped with respect to the selling in those years.

Why do they sell each year? Well, I guess that’s their business. I imagine they’ll have tax obligations that they can’t afford because of their share options / allocations from incentive programs. I imagine that the prospect of grabbing the money as close to the value that is allocated to them (which I guess they’re taxed on?) reduces the risk of not being able to afford the tax bill if a black swan event causes them to have to sell at a lower rate later in the year. I imagine that the prospect of having too large a percentage of their personal financial portfolio’s in ATM would also not be preferable for them… And of course, the prospect of getting the money would probably also entice.

So, what I have done about it? Well, I’ve written an email to a2 Milk on Friday (6 days ago) to confirm that the issue of milk quality isn’t a large issue and to see how they’re dealing with it. They have not responded, which is a bit of a governance issue and a little frustrating, but I feel more confident than I did last week that I understand the reasons for the drop in share price, so I took the opportunity to top up. Going forward, I expect that I will do so each year to take advantage of the directors selling (following analysis of the results, of course).


Why a2 Milk’s Share Price Fell After A Great Result

A2 Milk’s share price fell by up to 7% in the day after announcing an NPAT of $385.8 ($6.2m or just 1.6% less than my most recent prediction). As a 34.1% increase on last year, this is undeniably an impressive result. So why did the share price fall?

I have a couple of ideas on what caused the share price to fall. The first is a little sinister, while the second is more benign.

Is China Blocking Imports?

A recent post on by user 44wishlists brought some interesting articles to my attention. The articles stated that:

…The test results found that the contaminant 3-MCPD detected in 1 milk powder exceeded the recommended intake limit of the European Food Safety Agency, and 9 milk powders detected the genetic carcinogen glycidol, with the content ranging from 1.1 micrograms to 29 micrograms per kilogram , All comply with the EU’s upper limit regulations…

The issue was brought up in question time at the end of the recent shareholder presentation, and a2 Milk said that this had effected $5m to $10m worth of business for a2 Milk, but wasn’t included in their literature due to the timing it came up.

It’s possible that this could be the cause of the fall in share price. $10m in itself isn’t a big number against normal annual growth or NPAT, but the concern for me is that either:

  • China is charging ahead with its goals to be the biggest producer of its own infant formula, and is using its favorite method of blocking trade, which is to hold imports up in customs due to fictitious or unrealistic requirements.
  • There is a quality problem with the product.

Both possibilities are concerning, but I think that it’s probably unlikely that China is holding things up unreasonably because the populace need food. It’s more likely that (as stated in the article and at the presentation) the quality was within the standards agreed with the manufacturer, but not up to the Chinese import standard.

This is worrying for a few reasons. The fact that the news is a recent development causes uncertainty. Questions come to mind such as whether this will be an issue going forward, how much stock in the pipeline is affected, can the issue be fixed and at what cost, and whether a2 Milk are contractually obliged to keep buying the milk from the supplier even though they can’t sell it.

Are We Seeing Normal Market Behaviour?

Given the massive percentage increase in NPAT, it’s possible that the drop in share price is just normal market behavior.

The difference of just a few percentage points in growth can make a massive difference to the value of a company over the period of 5 years. Compare a compound growth graph showing 7% annual growth vs 9% and you’ll see the result is significantly different over a long period. This creates two factors that result in wildly different valuations:

  • Firstly, as any discrepancy in estimated growth is magnified and discrepancies are bigger in bigger numbers, this causes big discrepancies in valuations.
  • Secondly, depending on your investment timeframe, very large compounding growth over the years makes a very different result on the final calculation of ROI. As different investors have different timeframes of investment return, this creates a difference in valuation.

Therefore, I think there is an element of pure market force in the ATM share price. That said, given that the ATM share price is not too far from my own valuations (the methodology to calculate this is shared on this website), I feel that it’s more likely that not all shareholders were aware of the issues with getting milk to customers in China, and the fall in share price is probably a reaction to this news.

How significant this situation will be in the future is anyone’s guess at this stage, though certainly it felt downplayed during the presentation.

My current view is that a2 Milk’s suppliers will be forced to meet the new standards at their cost, otherwise they won’t be able to sell their milk after any existing contracts expire. Given this, they would likely want to fix this asap because the success of a2 Milk is in the suppliers interests if they wish to keep trading. Therefore, even if this costs a bunch of money and delays sales, it’s likely only a setback for part of this year, and therefore won’t impact long term holders too much (though the share price should definitely reflect this issue if it turns out to be greater than the $5m to $10m stated in the presentation).

On this logic, I took advantage of the price drop and topped up my holding, though admittedly I didn’t get the lowest price and I suspect there may be better buying opportunities to come. However, I’m not a trader so I don’t need to get the best price because the price I paid was close enough to my valuation to be acceptable.


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.