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>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

<ul><li>We retain our positive bias on The a2 Milk Company (ATM) heading into its 1H24 result on 19 February 2024 with our mosaic of datapoints continuing to be positive.</li><li>Specifically, Kantar data (what we view as comfortably the best data proxy for ATM) suggests upside risk to 1H24 consensus Infant Formula (IF) revenue forecasts.</li><li>While the share price has performed strongly over recent months, earnings multiples remain relatively undemanding and we retain our OUTPERFORM rating, particularly given increased confidence on the FY24 outlook.</li></ul>

We retain our positive bias on The a2 Milk Company (ATM) heading into its 1H24 result on 19 February 2024 with our mosaic of datapoints continuing to be positive.Specifically, Kantar data (what we view as comfortably the best data proxy for ATM) suggests upside risk to 1H24 consensus Infant Formula (IF) revenue forecasts.While the share price has performed strongly over recent months, earnings multiples remain relatively undemanding and we retain our OUTPERFORM rating, particularly given increased confidence on the FY24 outlook.

The A2 Milk Company - We Still Like the Formula

<ul><li>Births in China during 2023 of 9.02m were +15% ahead of our 7.86m forecast (and likely notably ahead of market expectations). At this stage we leave our earnings forecasts for The a2 Milk Company (ATM) unchanged but increase our 2024 new birth forecasts.</li><li>Under our revised industry model changes, we estimate the current share price implies ~+100 bps of China Infant Formula (IF) market share gains over the medium term, assuming ~15% EBITDA margins.</li><li>We are more optimistic and forecast ~+200–250 bps of market share expansion.</li></ul>

Births in China during 2023 of 9.02m were +15% ahead of our 7.86m forecast (and likely notably ahead of market expectations). At this stage we leave our earnings forecasts for The a2 Milk Company (ATM) unchanged but increase our 2024 new birth forecasts.Under our revised industry model changes, we estimate the current share price implies ~+100 bps of China Infant Formula (IF) market share gains over the medium term, assuming ~15% EBITDA margins.We are more optimistic and forecast ~+200–250 bps of market share expansion.

The A2 Milk Company -A Positive Macro Surprise

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/a2-milk-co-ltd-95d4fbed-afa1-41e9-bafb-a5f1ef97622e" target="_blank" data-smartkarma-citation="entities:22775:1" rel="noopener">A2 Milk Co Ltd (A2M AU)</a>, <a href="https://www.smartkarma.com/entities/amp-ltd" target="_blank" data-smartkarma-citation="entities:678:1" rel="noopener">AMP Ltd (AMP AU)</a> and <a href="https://www.smartkarma.com/entities/charter-hall-group" target="_blank" data-smartkarma-citation="entities:5593:1" rel="noopener">Charter Hall (CHC AU)</a> will be deleted from the MVIS Australia Equal Weight Index at the close 15 December.</li>
<li>Constituent changes plus capping and float changes result in a one-way turnover of 5.05% and will result in a one-way trade of A$99m.</li>
<li>There is a fair amount of short interest on the deletions and shorts could look to cover against the passive flow.</li>
</ul>



A2 Milk Co Ltd (A2M AU), AMP Ltd (AMP AU) and Charter Hall (CHC AU) will be deleted from the MVIS Australia Equal Weight Index at the close 15 December.
Constituent changes plus capping and float changes result in a one-way turnover of 5.05% and will result in a one-way trade of A$99m.
There is a fair amount of short interest on the deletions and shorts could look to cover against the passive flow.


MVIS Australia Equal Weight Index Rebalance: Three Deletions & Other Changes

New Zealand

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 (ATM NZ)

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

The A2 Milk Company - We Still Like the Formula

We retain our positive bias on The a2 Milk Company (ATM) heading into its 1H24 result on 19 February 2024 with our mosaic of datapoints continuing...

Forsyth Barr

The A2 Milk Company -A Positive Macro Surprise

Births in China during 2023 of 9.02m were +15% ahead of our 7.86m forecast (and likely notably ahead of market expectations). At this stage we...

Forsyth Barr

MVIS Australia Equal Weight Index Rebalance: Three Deletions & Other Changes

There are 3 deletions for the index in December. Estimated one-way turnover is 5% resulting in a one-way trade of A$99m. Shorts will look to cover...

Brian Freitas

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