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Equity Bottom-Up

<h2>The a2 Milk Company (ATM) 1H22 Result – Initial Impressions</h2>
The a2 Milk Company (ATM) reported a 1H22 result ahead of our (and consensus) expectations with EBITDA of NZ$97.6m (FB; NZ$80.1m, consensus NZ$79.1m) with greater China Label (CL) revenue and CBEC revenue the key drivers behind the beat versus our expectations. Outlook commentary lacks quantitative details but ATM now expects revenue growth in 2H22 on 1H22 driven by improved CL and English Label (EL) outlooks. This revised commentary is broadly in-line with our current forecasts (2H22 revenue of NZ$702m) but materially ahead of consensus (NZ$631m). ATM also stated&nbsp;revenue improvement is “not expected to translate into higher earnings” given cost investment. Our current 2H22 EBITDA forecast is NZ$87m (consensus; NZ$85m) − despite likely elevated costs in 2H22 (primarily marketing) we still assume consensus earnings upgrades are likely.
Key points of interest
<ul>
<li>1H22 summary: EBITDA of NZ$97.6m (FB; NZ$80m, consensus; NZ$79m). NPAT of NZ$56m (FB; NZ$45.7m, consensus; NZ$47m).</li>
<li>Divisional detail: ATM reported double digit declines in CL and daigou revenue (as expected) given the overhang of elevated inventory levels. CBEC only saw a modest YoY decline (-1%). Liquid milk revenue was broadly in-line with expectations.</li>
<li>Outlook: Revenue tracking ahead of its prior expectations – at this stage we assume consensus revenue and earnings upgrades are likely.
<ul>
<li>“The Company’s outlook for 2H22 revenue has improved. It is still expected to be significantly higher than 2H21, and with growth now expected on 1H22 and for FY22, ahead of initial expectations due mainly to growth in China label and English label IMF.”</li>
<li>“China label IMF sales are still expected to be up in FY22 and now expected to be significantly up in 2H22 versus 1H22. This is due to 1H22 having been impacted by distributor inventory rebalancing and in 2H22 as the Company’s growth strategy starts to have a positive impact on MBS and DOL sales.” – our current 2H CL forecasts assume +12% sequential half on half growth.</li>
<li>“In English label IMF, sales are now expected to be up in FY22 and up in 2H22 versus 1H22 due to improved inventory levels and pricing, as well as improved execution in ANZ reseller and CBEC channels driven by the Company’s growth strategy.” – our current 2H EL forecasts assume +2% sequential half on half growth.</li>
<li>Full year gross margins are expected to be broadly similar to 1H22 (~46.4%). Revenue improvement is “not expected to translate into higher earnings” given ATM’s growth investments. Our current 2H22 EBITDA forecast is NZ$87m (consensus; NZ$85m), both of which are below 1H22 (NZ$97.6m). Despite ATM’s stated ongoing investment into growth at this juncture we still assume consensus earnings upgrades are likely.</li>
</ul>
</li>
<li>Balance sheet/cash flow: ATM reported a cash balance of NZ$747m (which includes the purchase of Mataura Valley Milk (MVM) for NZ$268m in the period). This is a +NZ$140m increase on the adjusted (like for like) figure at FY21 of NZ$607m.</li>
</ul>
Investor briefing – 11am NZT (9am AEST)
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1H22 result summary
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 5cm; height: 12.75pt;">
NZ$m
</td>
<td style="width: 39.15pt; height: 12.75pt;">
1H21
</td>
<td style="width: 47.8pt; height: 12.75pt;">
1H22
</td>
<td style="width: 47.8pt; height: 12.75pt;">
% chg
</td>
<td style="width: 75.75pt; height: 12.75pt;">
Forsyth Barr
</td>
<td style="width: 39.15pt; height: 12.75pt;">
% diff
</td>
<td style="width: 64.8pt; height: 12.75pt;">
Consensus
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
Revenue
</td>
<td style="width: 39.15pt; height: 12.75pt;">
677.4
</td>
<td style="width: 47.8pt; height: 12.75pt;">
660.5
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-2%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
610.8
</td>
<td style="width: 39.15pt; height: 12.75pt;">
8%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
609.0
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
Gross profit
</td>
<td style="width: 39.15pt; height: 12.75pt;">
341.3
</td>
<td style="width: 47.8pt; height: 12.75pt;">
306.2
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-10%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
288.2
</td>
<td style="width: 39.15pt; height: 12.75pt;">
6%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
282.2
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
Gross margin
</td>
<td style="width: 39.15pt; height: 12.75pt;">
50.4%
</td>
<td style="width: 47.8pt; height: 12.75pt;">
46.4%
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-402bp
</td>
<td style="width: 75.75pt; height: 12.75pt;">
47.2%
</td>
<td style="width: 39.15pt; height: 12.75pt;">
-82bp
</td>
<td style="width: 64.8pt; height: 12.75pt;">
46.3%
</td>
</tr>
<tr>
<td style="width: 5cm; height: 13.5pt;">
Underlying EBITDA
</td>
<td style="width: 39.15pt; height: 13.5pt;">
183.0
</td>
<td style="width: 47.8pt; height: 13.5pt;">
97.6
</td>
<td style="width: 47.8pt; height: 13.5pt;">
-47%
</td>
<td style="width: 75.75pt; height: 13.5pt;">
80.1
</td>
<td style="width: 39.15pt; height: 13.5pt;">
22%
</td>
<td style="width: 64.8pt; height: 13.5pt;">
79.1
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
EBITDA margin
</td>
<td style="width: 39.15pt; height: 12.75pt;">
27.0%
</td>
<td style="width: 47.8pt; height: 12.75pt;">
14.8%
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-1225bp
</td>
<td style="width: 75.75pt; height: 12.75pt;">
13.1%
</td>
<td style="width: 39.15pt; height: 12.75pt;">
166bp
</td>
<td style="width: 64.8pt; height: 12.75pt;">
13.0%
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
Underlying profit
</td>
<td style="width: 39.15pt; height: 12.75pt;">
124.5
</td>
<td style="width: 47.8pt; height: 12.75pt;">
56.0
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-55%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
45.7
</td>
<td style="width: 39.15pt; height: 12.75pt;">
23%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
47.0
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
Underlying EPS (cps)
</td>
<td style="width: 39.15pt; height: 12.75pt;">
16.8
</td>
<td style="width: 47.8pt; height: 12.75pt;">
7.5
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-55%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
6.1
</td>
<td style="width: 39.15pt; height: 12.75pt;">
23%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
6.3
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
Interim dividend (cps)
</td>
<td style="width: 39.15pt; height: 12.75pt;">
0.0
</td>
<td style="width: 47.8pt; height: 12.75pt;">
0.0
</td>
<td style="width: 47.8pt; height: 12.75pt;">
n/a
</td>
<td style="width: 75.75pt; height: 12.75pt;">
0.0
</td>
<td style="width: 39.15pt; height: 12.75pt;">
n/a
</td>
<td style="width: 64.8pt; height: 12.75pt;">
0.0
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;"></td>
<td style="width: 39.15pt; height: 12.75pt;"></td>
<td style="width: 47.8pt; height: 12.75pt;"></td>
<td style="width: 47.8pt; height: 12.75pt;"></td>
<td style="width: 75.75pt; height: 12.75pt;"></td>
<td style="width: 39.15pt; height: 12.75pt;"></td>
<td style="width: 64.8pt; height: 12.75pt;"></td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
NZ$m
</td>
<td style="width: 39.15pt; height: 12.75pt;">
1H21
</td>
<td style="width: 47.8pt; height: 12.75pt;">
1H22
</td>
<td style="width: 47.8pt; height: 12.75pt;">
% chg
</td>
<td style="width: 75.75pt; height: 12.75pt;">
Forsyth Barr
</td>
<td style="width: 39.15pt; height: 12.75pt;">
% diff
</td>
<td style="width: 64.8pt; height: 12.75pt;">
Consensus
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
IF - ANZ / daigou (A)
</td>
<td style="width: 39.15pt; height: 12.75pt;">
209.5
</td>
<td style="width: 47.8pt; height: 12.75pt;">
179.9
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-14%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
180.0
</td>
<td style="width: 39.15pt; height: 12.75pt;">
-0.1%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
174.7
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
IF - CBEC (B)
</td>
<td style="width: 39.15pt; height: 12.75pt;">
103.5
</td>
<td style="width: 47.8pt; height: 12.75pt;">
102.4
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-1%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
87.5
</td>
<td style="width: 39.15pt; height: 12.75pt;">
17.0%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
89.6
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
IF - total English Label (A+B)
</td>
<td style="width: 39.15pt; height: 12.75pt;">
313.0
</td>
<td style="width: 47.8pt; height: 12.75pt;">
282.3
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-10%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
267.5
</td>
<td style="width: 39.15pt; height: 12.75pt;">
5.5%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
264.3
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
IF - China Label
</td>
<td style="width: 39.15pt; height: 12.75pt;">
213.1
</td>
<td style="width: 47.8pt; height: 12.75pt;">
188.7
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-11%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
160.0
</td>
<td style="width: 39.15pt; height: 12.75pt;">
17.9%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
185.0
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
Liquid Milk
</td>
<td style="width: 39.15pt; height: 12.75pt;">
124.7
</td>
<td style="width: 47.8pt; height: 12.75pt;">
124.9
</td>
<td style="width: 47.8pt; height: 12.75pt;">
0%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
120.5
</td>
<td style="width: 39.15pt; height: 12.75pt;">
3.6%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
123.8
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
Other/MVM
</td>
<td style="width: 39.15pt; height: 12.75pt;">
26.6
</td>
<td style="width: 47.8pt; height: 12.75pt;">
64.7
</td>
<td style="width: 47.8pt; height: 12.75pt;">
143%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
62.8
</td>
<td style="width: 39.15pt; height: 12.75pt;">
3.0%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
35.9
</td>
</tr>
<tr>
<td style="width: 5cm; height: 12.75pt;">
Total revenue
</td>
<td style="width: 39.15pt; height: 12.75pt;">
677.4
</td>
<td style="width: 47.8pt; height: 12.75pt;">
660.5
</td>
<td style="width: 47.8pt; height: 12.75pt;">
-2%
</td>
<td style="width: 75.75pt; height: 12.75pt;">
610.8
</td>
<td style="width: 39.15pt; height: 12.75pt;">
8.1%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
609.0
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis, Company reports

The a2 Milk Company (ATM) 1H22 Result – Initial Impressions
The a2 Milk Company (ATM) reported a 1H22 result ahead of our (and consensus) expectations with EBITDA of NZ$97.6m (FB; NZ$80.1m, consensus NZ$79.1m) with greater China Label (CL) revenue and CBEC revenue the key drivers behind the beat versus our expectations. Outlook commentary lacks quantitative details but ATM now expects revenue growth in 2H22 on 1H22 driven by improved CL and English Label (EL) outlooks. This revised commentary is broadly in-line with our current forecasts (2H22 revenue of NZ$702m) but materially ahead of consensus (NZ$631m). ATM also stated&nbsp;revenue improvement is “not expected to translate into higher earnings” given cost investment. Our current 2H22 EBITDA forecast is NZ$87m (consensus; NZ$85m) − despite likely elevated costs in 2H22 (primarily marketing) we still assume consensus earnings upgrades are likely.
Key points of interest

1H22 summary: EBITDA of NZ$97.6m (FB; NZ$80m, consensus; NZ$79m). NPAT of NZ$56m (FB; NZ$45.7m, consensus; NZ$47m).
Divisional detail: ATM reported double digit declines in CL and daigou revenue (as expected) given the overhang of elevated inventory levels. CBEC only saw a modest YoY decline (-1%). Liquid milk revenue was broadly in-line with expectations.
Outlook: Revenue tracking ahead of its prior expectations – at this stage we assume consensus revenue and earnings upgrades are likely.

“The Company’s outlook for 2H22 revenue has improved. It is still expected to be significantly higher than 2H21, and with growth now expected on 1H22 and for FY22, ahead of initial expectations due mainly to growth in China label and English label IMF.”
“China label IMF sales are still expected to be up in FY22 and now expected to be significantly up in 2H22 versus 1H22. This is due to 1H22 having been impacted by distributor inventory rebalancing and in 2H22 as the Company’s growth strategy starts to have a positive impact on MBS and DOL sales.” – our current 2H CL forecasts assume +12% sequential half on half growth.
“In English label IMF, sales are now expected to be up in FY22 and up in 2H22 versus 1H22 due to improved inventory levels and pricing, as well as improved execution in ANZ reseller and CBEC channels driven by the Company’s growth strategy.” – our current 2H EL forecasts assume +2% sequential half on half growth.
Full year gross margins are expected to be broadly similar to 1H22 (~46.4%). Revenue improvement is “not expected to translate into higher earnings” given ATM’s growth investments. Our current 2H22 EBITDA forecast is NZ$87m (consensus; NZ$85m), both of which are below 1H22 (NZ$97.6m). Despite ATM’s stated ongoing investment into growth at this juncture we still assume consensus earnings upgrades are likely.


Balance sheet/cash flow: ATM reported a cash balance of NZ$747m (which includes the purchase of Mataura Valley Milk (MVM) for NZ$268m in the period). This is a +NZ$140m increase on the adjusted (like for like) figure at FY21 of NZ$607m.

Investor briefing – 11am NZT (9am AEST)
Requires pre-registration;&nbsp;https://s1.c-conf.com/diamondpass/10018573-asms77.html
1H22 result summary




NZ$m


1H21


1H22


% chg


Forsyth Barr


% diff


Consensus




Revenue


677.4


660.5


-2%


610.8


8%


609.0




Gross profit


341.3


306.2


-10%


288.2


6%


282.2




Gross margin


50.4%


46.4%


-402bp


47.2%


-82bp


46.3%




Underlying EBITDA


183.0


97.6


-47%


80.1


22%


79.1




EBITDA margin


27.0%


14.8%


-1225bp


13.1%


166bp


13.0%




Underlying profit


124.5


56.0


-55%


45.7


23%


47.0




Underlying EPS (cps)


16.8


7.5


-55%


6.1


23%


6.3




Interim dividend (cps)


0.0


0.0


n/a


0.0


n/a


0.0













NZ$m


1H21


1H22


% chg


Forsyth Barr


% diff


Consensus




IF - ANZ / daigou (A)


209.5


179.9


-14%


180.0


-0.1%


174.7




IF - CBEC (B)


103.5


102.4


-1%


87.5


17.0%


89.6




IF - total English Label (A+B)


313.0


282.3


-10%


267.5


5.5%


264.3




IF - China Label


213.1


188.7


-11%


160.0


17.9%


185.0




Liquid Milk


124.7


124.9


0%


120.5


3.6%


123.8




Other/MVM


26.6


64.7


143%


62.8


3.0%


35.9




Total revenue


677.4


660.5


-2%


610.8


8.1%


609.0




Source: Forsyth Barr analysis, Company reports

The A2 Milk Company (ATM): 1H22 Result – Initial Impressions

A2 Milk Co Ltd

The A2 Milk Company (ATM): 1H22 Result – Initial Impressions