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

<h2>The a2 Milk Company</h2>
A Taste of the Recipe
The a2 Milk Company’s (ATM) inaugural Investor Day in Shanghai reinforced (1) the magnitude of optionality and opportunity for the brand, (2) data driven and consumer-led decision making, (3) strong emphasis on investing to support the next phase. However, how to distil this down in terms of quantum, timeframes and pathway of key value drivers remains the challenge, with a wide range of justifiable outcomes. We see a favourable risk/reward at current valuation metrics. OUTPERFORM.
Consistent messages through the Investor Day
There was no change in overall themes, priorities or outlook but ATM’s Investor Day provided greater context on its key focus areas and markets. Key messages through the day:
<ul>
<li>Significant extent of the opportunity with the brand only touching the surface of its potential. Consumer demand continues to build and the level of loyalty is encouraging, outpacing competitors across its product portfolio.</li>
<li>Continuous iteration: ‘Test and learn’ mentality, not ‘set and forget’.</li>
<li>“Stepping it up” with a reiteration and emphasis that this phase will see a step-up in investing behind the brand, in people, capability and technology. Success measures are largely revenue focussed (or revenue drivers) and maintaining ‘healthy’ gross margins by product categories.</li>
<li>Depth of understanding of its consumer: ATM demonstrated deep market understanding and impressive customer segmentation. Data-driven and market-specific decision making provides some comfort in the step-change in investment being made, although it remains difficult to judge ‘success’ and forecast return on that spend.</li>
<li>Complex, fragmented market: Channels to market in China are complementary, converging and the power of social networks cannot be underestimated. The pace of change is rapid and unpredictable. ATM’s strategy should continue to drive the ‘consumer pull’ for its brand which, combined with the high levels of loyalty for its products, appears a sensible way to tackle a highly competitive, evolving market.</li>
<li>Energised and high quality wider senior leadership team</li>
</ul>
Material growth runway evident although quantifying this is no easier
Management’s decision to focus on building its brand and future-proofing growth should yield dividends long-term. However, the extent of the prize, timing and pathway remains difficult to quantify, with a wide range of justifiable outcomes. ATM’s confidence is apparent, and arguably growing.
We expect volatility to continue to be a feature for investors, however, we are attracted to the opportunity ahead and how ATM is positioning itself to leverage this. Valuation metrics are attractive vs peers, history and an expensive market, particularly given strong free cashflow, a large net cash position and its growth potential. The recent takeover offer for peer Bellamy’s (at FY20/21E bid multiples: EVEBITDA 27x/21x and PE 46x/36x) also provides valuation support and reinforces the attractiveness/value of a brand like ATM.
<div class="content-highlight">
Investment View
We are attracted to the opportunity for ATM in existing markets in addition to new markets and products — with ATM currently only scratching the surface of a material market opportunity. Valuation outcomes are wide, but in our view current valuation metrics offer a favourable risk/reward, particularly when adjusted for loss-making markets. OUTPERFORM.
</div>
Chelsea Leadbetter, CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262

The a2 Milk Company
A Taste of the Recipe
The a2 Milk Company’s (ATM) inaugural Investor Day in Shanghai reinforced (1) the magnitude of optionality and opportunity for the brand, (2) data driven and consumer-led decision making, (3) strong emphasis on investing to support the next phase. However, how to distil this down in terms of quantum, timeframes and pathway of key value drivers remains the challenge, with a wide range of justifiable outcomes. We see a favourable risk/reward at current valuation metrics. OUTPERFORM.
Consistent messages through the Investor Day
There was no change in overall themes, priorities or outlook but ATM’s Investor Day provided greater context on its key focus areas and markets. Key messages through the day:

Significant extent of the opportunity with the brand only touching the surface of its potential. Consumer demand continues to build and the level of loyalty is encouraging, outpacing competitors across its product portfolio.
Continuous iteration: ‘Test and learn’ mentality, not ‘set and forget’.
“Stepping it up” with a reiteration and emphasis that this phase will see a step-up in investing behind the brand, in people, capability and technology. Success measures are largely revenue focussed (or revenue drivers) and maintaining ‘healthy’ gross margins by product categories.
Depth of understanding of its consumer: ATM demonstrated deep market understanding and impressive customer segmentation. Data-driven and market-specific decision making provides some comfort in the step-change in investment being made, although it remains difficult to judge ‘success’ and forecast return on that spend.
Complex, fragmented market: Channels to market in China are complementary, converging and the power of social networks cannot be underestimated. The pace of change is rapid and unpredictable. ATM’s strategy should continue to drive the ‘consumer pull’ for its brand which, combined with the high levels of loyalty for its products, appears a sensible way to tackle a highly competitive, evolving market.
Energised and high quality wider senior leadership team

Material growth runway evident although quantifying this is no easier
Management’s decision to focus on building its brand and future-proofing growth should yield dividends long-term. However, the extent of the prize, timing and pathway remains difficult to quantify, with a wide range of justifiable outcomes. ATM’s confidence is apparent, and arguably growing.
We expect volatility to continue to be a feature for investors, however, we are attracted to the opportunity ahead and how ATM is positioning itself to leverage this. Valuation metrics are attractive vs peers, history and an expensive market, particularly given strong free cashflow, a large net cash position and its growth potential. The recent takeover offer for peer Bellamy’s (at FY20/21E bid multiples: EVEBITDA 27x/21x and PE 46x/36x) also provides valuation support and reinforces the attractiveness/value of a brand like ATM.

Investment View
We are attracted to the opportunity for ATM in existing markets in addition to new markets and products — with ATM currently only scratching the surface of a material market opportunity. Valuation outcomes are wide, but in our view current valuation metrics offer a favourable risk/reward, particularly when adjusted for loss-making markets. OUTPERFORM.

Chelsea Leadbetter, CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262

The A2 Milk Company: A Taste of the Recipe

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: A Taste of the Recipe

The a2 Milk Company A Taste of the Recipe The a2 Milk Company’s (ATM) inaugural Investor Day in Shanghai reinforced (1) the magnitude of...

Forsyth Barr

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