A2M (ASX) - BUY ~ 3.68

29 Jul 2017

 

 

 

 

 

GENERAL THOUGHTS

  • Everyone loves milk - quality milk - especially the Chinese. Chinese consumers and daigou have all switched to A2 Platinum to the point where they believe it is a far superior product leaving Bellamy’s behind

  • There is no other comparable company in the market with such a great potential in the next 12 - 24 months

  • In Australia, “milk is still seen as a staple, everyone has a bottle of milk in their fridge,”

  • Migration trend, population keep rising 

  • On fundamentals, A2M looks expensive but it’s easily justifiable on a ROE of 31.80% which is forecast to rise to 44.69% the next year.

  • 213% expected Earning Growth over 3 years (SimplyWall)

  • ROE = 43.98%

  • No Debt

  • Plan to accumulate this stock below $5.0 and hold for at least 1 year

 

TRADING PLAN

 

Position Size 

  • Portfolio Starting Equity = $100k

  • Risk = 1%

  • ATR Multiple = 2

  • Stock ATR Weekly (5) = 0.3

  • Recommended Quantity = 1,000 shares

  • Initial Buy = 1,000 shares @ 3.68

    • Pyramid #1 = 500 shares @ 4.06

    • Pyramid #2 = 1,500 shares @ 4.36

    • Pyramid #3 = 2,000 shares @ 4.65

    • Pyramid #4 = 3,000 shares @ 6.12

Target Price: $10

 

Stop

 

 

 

 

 

 

 

ANALYSIS

 

STRENGTHS

 

 

 

 

 

 

 

 

 

WEAKNESS

Heavily leveraged to the Chinese infant formula market 

High FY18 PE of 32x, which indicates that most of A2M's short term earnings growth is already priced in (GR4).
 
 

OPPORTUNITY

 

- large Chinese market (now only 3.1% market share in China

- US and UK markets

 

THREATS

 
Chinese regulation is at the best of times, unpredictable, hence we have limited transparency of the company's future earnings (GR3). .
 
The recent news that A2M’s infant formula manufacturer, Synlait Milk, had received Chinese Food and Drug Administration (CFDA) approval well ahead of the deadline removes a key risk for the stock.
 

 

 

TECHNICAL  

 

 

 

 

 

 

 

 

 

 

 

 

 

Optimistic about A2 Milk

 

Ongoing gross margin expansion and continued rapid growth in sales of its A2 Platinum infant formula, especially in the large Chinese market. 

Management is doing an exceptional job of building a premium dairy business, leveraging its intellectual property associated with the production and marketing of ‘A2 protein’ based products.

A2 Platinum infant formula has grown rapidly to 3.1% market share in China according to market research firm, Kantar, and we see no reason why this will not continue to accelerate, especially given the regulatory crackdown in China which ought to see brand rationalisation among competitors.

The recent news that A2M’s infant formula manufacturer, Synlait Milk, had received Chinese Food and Drug Administration (CFDA) approval well ahead of the deadline removes a key risk for the stock.

Going forward, we see significant potential for management to grow the product portfolio and gain traction in new geographies including the US and UK markets where A2M is already investing heavily to grow its fresh milk business.

 

 

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