New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<ul><li>The a2 Milk Company's (ATM) FY24 result provided little new information to change our view on the medium/long-term earnings outlook, but did affirm: (1) the solid market share growth, consistent with our data tracking (positively led by early stage products), and (2) the challenging market backdrop (competition and industry volumes), which will continue to be a headwind to margin expansion over the medium-term.</li><li>The canary in the coal mine, where investors may feel uneasy following the FY24 result, is ATM calling out supply issues from its key supplier Synlait Milk (SML.NZ).</li><li>FY25 EBITDA is set to be adversely impacted by at least -NZ$15m as a result, but more importantly it raises questions: (1) that similar issues could occur in the future, and (2) if it will impact new customer acquisition (the timing of which is particularly unfortunate, given CY24 births growth). </li></ul>

The a2 Milk Company's (ATM) FY24 result provided little new information to change our view on the medium/long-term earnings outlook, but did affirm: (1) the solid market share growth, consistent with our data tracking (positively led by early stage products), and (2) the challenging market backdrop (competition and industry volumes), which will continue to be a headwind to margin expansion over the medium-term.The canary in the coal mine, where investors may feel uneasy following the FY24 result, is ATM calling out supply issues from its key supplier Synlait Milk (SML.NZ).FY25 EBITDA is set to be adversely impacted by at least -NZ$15m as a result, but more importantly it raises questions: (1) that similar issues could occur in the future, and (2) if it will impact new customer acquisition (the timing of which is particularly unfortunate, given CY24 births growth). 

The A2 Milk Company - FY24 Result — Canary in the Coal Mine?

<ul><li>Most indicators are pointing to a robust FY24 result when The a2 Milk Company (ATM) reports on Monday, 19 August.</li><li>Our mosaic of data points shows: (1) strong market share gains (supported by ongoing consolidation), particularly in the offline channel, and (2) solid brand health metrics.</li><li>FY25 consensus revenue expectations don't appear stretched in light of ATM's 2H24 exit run-rate (and improving CY24 birth rates), but an EBITDA margin of ~15.2% is at the top-end of our expectations (absent any material US or Mataura Valley Milk [MVM] changes). </li></ul>

Most indicators are pointing to a robust FY24 result when The a2 Milk Company (ATM) reports on Monday, 19 August.Our mosaic of data points shows: (1) strong market share gains (supported by ongoing consolidation), particularly in the offline channel, and (2) solid brand health metrics.FY25 consensus revenue expectations don't appear stretched in light of ATM's 2H24 exit run-rate (and improving CY24 birth rates), but an EBITDA margin of ~15.2% is at the top-end of our expectations (absent any material US or Mataura Valley Milk [MVM] changes). 

The A2 Milk Company - FY24 Preview — Well Formulated External Inbox

<ul><li>Kantar data provides an indicator of brand strength for The a2 Milk Company (ATM) and its key competitors in the infant formula (IF) segment, capturing purchasing habits for a sample of consumers across Urban China.</li><li>February data (four week period ended 23 February 2024) was weak for the industry, and ATM's market share cycled off recent highs, but rolling trends remain constructive.</li><li>FY24 year-to-date data is tracking modestly ahead of consensus expectations and company guidance, but we caution: (1) comparable periods get harder over the next two months, (2) its start to 2H24 is modestly behind its strong end to 1H24, and (3) the inherent volatility in the data. </li></ul>

Kantar data provides an indicator of brand strength for The a2 Milk Company (ATM) and its key competitors in the infant formula (IF) segment, capturing purchasing habits for a sample of consumers across Urban China.February data (four week period ended 23 February 2024) was weak for the industry, and ATM's market share cycled off recent highs, but rolling trends remain constructive.FY24 year-to-date data is tracking modestly ahead of consensus expectations and company guidance, but we caution: (1) comparable periods get harder over the next two months, (2) its start to 2H24 is modestly behind its strong end to 1H24, and (3) the inherent volatility in the data. 

<ul><li>It was difficult to fault The a2 Milk Company's (ATM) 1H24 result. (1) Infant Formula (IF) revenue was ahead of our expectations, (2) solid cost control was evident, (3) cash flow was robust with ATM's net cash growing to ~NZ$790m, and (4) strong growth was delivered in ‘other nutritionals’.</li><li>In-market execution is impressive, the earnings outlook continues to be de-risked, and ATM has a strong cash position of ~NZ$800m.</li><li>That said, we view current valuation as fair and downgrade our rating to NEUTRAL.</li></ul>

It was difficult to fault The a2 Milk Company's (ATM) 1H24 result. (1) Infant Formula (IF) revenue was ahead of our expectations, (2) solid cost control was evident, (3) cash flow was robust with ATM's net cash growing to ~NZ$790m, and (4) strong growth was delivered in ‘other nutritionals’.In-market execution is impressive, the earnings outlook continues to be de-risked, and ATM has a strong cash position of ~NZ$800m.That said, we view current valuation as fair and downgrade our rating to NEUTRAL.

The A2 Milk Company - Time for a Breather Downgrade to NEUTRAL

<ul><li>We expect 1H24 to be another period of The a2 Milk Company (ATM) ‘swimming against the tide’ well. </li><li>Data continues to show strong market share gains (market share is now at record levels) but 1H24 will be the most challenging period yet for the industry (not helped by the disruptive China Label [CL] transition).</li><li>We expect no change to FY24 guidance with ATM likely to point towards solid revenue indicators and by virtue guide to robust 2H24 earnings growth (+8%).</li></ul>

We expect 1H24 to be another period of The a2 Milk Company (ATM) ‘swimming against the tide’ well. Data continues to show strong market share gains (market share is now at record levels) but 1H24 will be the most challenging period yet for the industry (not helped by the disruptive China Label [CL] transition).We expect no change to FY24 guidance with ATM likely to point towards solid revenue indicators and by virtue guide to robust 2H24 earnings growth (+8%).

The A2 Milk Company -1H24 Preview — Crawling Ahead

Australia

a2 Milk Company Limited produces cow milk which is free of a protein called beta casein A1.  The Company 
offers its products in Australia and New Zealand.

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A2 Milk Co Ltd (A2M AU)

The A2 Milk Company - FY24 Result — Canary in the Coal Mine?

At this stage we ‘trust’ that the issues will be isolated to 1H25. ATM's PE re-rate over recent months has now unwound, and it trades on ~24x PE...

Forsyth Barr

The A2 Milk Company - FY24 Preview — Well Formulated External Inbox

Our mosaic of data points shows: (1) strong market share gains (supported by ongoing consolidation), particularly in the offline channel, and (2)...

Forsyth Barr

The A2 Milk Company - Kantar Data Check

Kantar data provides an indicator of brand strength for The a2 Milk Company (ATM) and its key competitors in the infant formula (IF) segment

Forsyth Barr

The A2 Milk Company - Time for a Breather Downgrade to NEUTRAL

In-market execution is impressive, the earnings outlook continues to be de-risked, and ATM has a strong cash position of ~NZ$800m.

Forsyth Barr

The A2 Milk Company -1H24 Preview — Crawling Ahead

We expect 1H24 to be another period of The a2 Milk Company (ATM) ‘swimming against the tide’ well. Data continues to show strong market share...

Forsyth Barr

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