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| Buy The A2 Milk Company A2M |
| Current Share Price 6.76 Buy rating with 7.50A2M has had a horrible 12 months as a result of souring relationships between Australia and China as well as the impact of Corona. It has suffered almost a 70% decline in the share price since June last year.A few reason to why we think it may have bottomed out: Daigou is a term for cross-border exporting in which an individual or a syndicated group of exporters outside China purchases for customers in China. Australia-China exports volumes (proxy for Daigous) had their first YOY increase since May’19, up +56% YOY in May’21. Four of the last five months have experienced Month on Month growth, with May’21 the highest reading since Jun’20. On a reduced three month basis, volumes are up +54% from the Jan’21 low and like other major markets, are demonstrating signs of bottoming. China IMF imports: The largest exporters of IMF to China are the EU, NZ and Australia. Movements in volumes to China from these markets can be indicative of overall market dynamics. While volumes continue to demonstrate double digit YOY declines (-26% YOY in Apr’21), sequentially volumes look to have formed a bottom in recent months, up +29% from Jan’21 lows, with three consecutive MOM gains. Exchange rate fluctuations: China offline and Cross Border E-Commerce are transacted in USD and therefore NZD weakness against the USD is a tailwind. In addition, weakness in the AUD against the CNY is potentially supportive of improved Daigou margins. (Bell Potter)Purchase of Mataura approved. The New Zealand Overseas Investment Office has given The a2 Milk Company’s plan to buy a 75 per cent interest in dairy nutrition business Mataura Valley Milk approval.A completion of the $NZ270 million ($245 million) deal announced last August will move ahead from the end of this month. The factory in Southland, New Zealand, will enable a2 Milk to move down the supply chain into manufacturing nutritional products.The dual-listed company said the deal would strengthen its relationships with China because MVM’s current majority shareholder, China Animal Husbandry Group, will retain a 25 per cent interest. CAHG is a wholly owned subsidiary of China National Agriculture Development Group, parent of a2 Milk’s logistics and distribution partner in China, CSFA Holdings Shanghai (China State Farm). China announced that it will allow couples to have up to three children China scrapped its decades-old one-child policy in 2016, replacing it with a two-child limit which has failed to lead to a sustained upsurge in births.The cost of raising children in cities has deterred many Chinese couples.The latest move was approved by President Xi Jinping at a meeting of top Communist Party officials.It will come with “supportive measures, which will be conducive to improving our country’s population structure, fulfilling the country’s strategy of actively coping with an ageing population and maintaining the advantage, endowment of human resources”, according to Xinhua news agency.The chart shows that the down trend has ended. |
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| From Watermark Funds Management Through the health crisis, there was a big pantry restock in China as mother and baby stores, and the civic channel lighted up on formula. And then they had to deal with the aftermath of that in the ensuing quarters. The channel was full, the cross passed quickly in China, and all of a sudden there was a buyer strike, prices started falling. And because infant formula is so dependent on the channel these traders rely very much on a high price. So as the daigou were faced with falling prices they just dumped their product.And so new management’s come in, they’ve basically cleared the channel, have written off all that stock. The daigou now have got a get out of jail card basically. The daigou now are reordering, prices are coming back up, and the brand is trading well, they’re actually picking up a bit of share. So we think that we’re all really good signs for the brand.And the street has destroyed earnings in the outer years. The 2023 estimates for a profit are a third of where they were 18 months ago. So we think as the business recovers, those profit expectations will really surprise on the upside, and the stock will recover its rating. I think it’s the stock for 2022. Target prices: Target prices have a large range and we interpret this as the market not knowing how to price it. We think that the new management team will have likely lowered expectations on future growth. ie under promised and over delivered. The next major event for them will be when they report in late August. Target Price Raised 10% to A$5.50/Share by Credit Suisse>A2M.AU5/7/21 Price Target Cut 20% to A$6.65/Share by Morgans11/5/21 Target Price Cut 43% to A$5.60/Share by Macquarie>A2M.AU11/5/21 Price Target Cut 18% to A$5.85/Share by Citi11/5/21 Target Price Cut 29% to NZ$7.50/Share by Morgan Stanley>ATM.NZ11/5/21 Target Price Cut 29% to A$7.10/Share by Morgan Stanley>A2M.AU11/5/21 Price Target Cut 13% to NZ$13.50/Share by UBS11/5/21 Price Target Cut 11% to A$8.50/Share by Bell Potter11/5/21 Consensus price target from Banyan tree of $7.41 |
The a2 Milk Company Limited, together with its subsidiaries, sells A2 protein type branded milk and related products in Australia, New Zealand, China, other Asian countries, and the United States. The company offers fresh milk under the a2 Milk brand; and infant formula under the a2 Platinum brand. The company was formerly known as A2 Corporation Limited and changed its name to The a2 Milk Company Limited in April 2014. The a2 Milk Company Limited was founded in 2000 “and is based in Auckland, New Zealand. ” |
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