Originally Posted by
Greekwatchdog
For Bars Report
Proprietary Channel Checking in China
OUTPERFORM
We recently visited 34 stores in China, interviewing sales reps & store managers, analysing a2's shelf presence, pricing, and
the perception of New Zealand sourced infant formula. We complemented this with a proprietary online survey, with 105
responses from end customers. Travel restrictions meant the channel checks were undertaken by our colleagues in Hong
Kong. Our findings provide confidence that The a2 Milk Company (ATM) is performing well in the key offline channel. It also
supports our view that the recent daigou-linked downgrade is a temporary issue, particularly as channel mix readjusts. After
recent underperformance, ATM is trading at a one year forward PE of ~24x (~21x adjusted for cash and ~19x when also
adjusted for US losses) — attractive against any benchmark.
Three key take-aways from our proprietary channel checks
Other notable points of interest
N E W Z E A L A N D E Q U I T Y R E S E A RC H F O O D, B E V S , & AG R I DA I R Y N U T R I T I O N C O M PA N Y
5 N OV E M B E R 2 0 2 0
NZX Code ATM
Share price NZ$14.35
Target price NZ$23.00
Risk rating High
Issued shares 736.5m
Market cap NZ$10,568m
Avg daily turnover 782.4k (NZ$13,395k)
Financials: Jun/ 20A 21E 22E 23E
NPAT* (NZ$m) 385.8 406.7 498.2 573.1
EPS* (NZc) 52.1 54.9 67.3 77.4
EPS growth* (%) 34.4 5.4 22.5 15.0
DPS (NZc) 0.0 0.0 0.0 23.2
Imputation (%) 100 100 100 100
*Based on normalised profits
Valuation (x) 20A 21E 22E 23E
PE 27.5 26.1 21.3 18.5
EV/EBIT 17.7 16.2 13.1 11.4
EV/EBITDA 17.5 16.0 12.9 11.2
Price / NTA 9.4 7.0 5.3 4.2
Cash div yld (%) 0.0 0.0 0.0 1.6
Gross div yld (%) 0.0 0.0 0.0 2.2
Very high recognition that a2 Platinum is New Zealand sourced. 91% of Mother & Baby Store (MBS) personnel we spoke to
indicated that a2 is New Zealand sourced, with the balance citing New Zealand and Australia. This is particularly important given
recent escalating geopolitical tension between China and Australia.
Strong performance for ATM across our channel checks, with results from our MBS visits surprisingly the strongest. This
includes a2 ranking #1 brand in our MBS interviews, with a2 the most consistently named brand in the “top sellers”. This is
encouraging given we view the offline channel as the key avenue of growth for ATM.
New Zealand/foreign still ranking well, albeit observable lift in domestic: New Zealand still tops the list for IF quality
perception (by a large margin), however, MBS personnel noted some change in consumer behaviour in favour of domestic brands.
Signs of discipline from ATM. With well controlled pricing and what appears to be a targeted marketing and investment approach.
Predominant resistance against buying a2 was price (~18% of total responses in both our offline and online surveys).
Category showing resilience; 86% of respondents said they would not change their IF brand of choice if their income declined.
No observable inventory turn issues. With expiry dates fresh and ATM’s new lid at all stores visited.