New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>The a2 Milk Company<br>Catalyst Check</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Five key catalysts that have the potential to drive sentiment and/or performance for The a2 Milk Company (ATM) are currently negatively skewed, albeit likely to improve over the medium-term. The substantial re-basing of market expectations for ATM appears complete, however our mosaic of channel checks suggest we haven't turned a corner yet. ATM has a number of redeeming features (strong brand, net cash, attractive returns/free cashflow), however, an elevation in risks and a deterioration in industry dynamics have clouded the near-term picture. This is not lost on the market with a material de-rate in valuation to ~19x one year forward PE, cash-adjusted. However, at this juncture there is too much uncertainty to have conviction in a directional call, with risk/reward broadly balanced and catalysts still yet to show a turn in momentum. NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Target price</strong>:&nbsp;NZ$7.15 (-5%) due to higher longer-term marketing forecasts and a slightly moderated&nbsp;daigou&nbsp;recovery path.</li>
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<h3>Catalyst watch&nbsp;— currently negatively skewed; albeit likely to improve in medium-term</h3>
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<p>Our catalyst watch falls into five buckets, driven by regular channel checks, industry discussions and data analysis. In aggregate they have deteriorated over the past two years, not helped by COVID-19.&nbsp;We expect FY21&nbsp;to be the bottom, albeit it will likely still take time to show a meaningful improvement.</p>
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<li style="list-style-type: none;"><strong>#1. Consensus expectations:</strong>&nbsp;Very wide, capturing most feasible scenarios. If anything, we view medium-term consensus as slightly conservative.&nbsp;However, we don't expect this to be&nbsp;proven&nbsp;up in the near-term, with the backdrop still challenging to navigate</li>
<li style="list-style-type: none;"><strong>#2. Macro backdrop:</strong>&nbsp;Difficult, with no signs of pressure abating in the near-term. Taking a longer view, we expect government intervention to help with birth rates and a&nbsp;daigou&nbsp;recovery when borders re-open, albeit local competition is unlikely to abate</li>
<li style="list-style-type: none;"><strong>#3. ATM data points and anecdotes:</strong>&nbsp;Our mosaic of channel checks show no notable sign of a turnaround in English label momentum, as yet, not helped by some aged inventory still in the channel. Meanwhile, China label growth indicators remain in tact. We expect data points for English label to improve through 2H CY21</li>
<li style="list-style-type: none;"><strong>#4. ATM strategy review:</strong>&nbsp;We are not expecting any material shift in direction, albeit expect commentary/outcomes to likely be positive for revenue and negative for margins. We also believe capital management is likely</li>
<li style="list-style-type: none;"><strong>#5. Geopolitical risk:</strong> Heightened. Recent events are a reminder of the risk, which is largely unpredictable and unquantifiable. In ATM's case we view the key risk as being to investor sentiment, while see risk to earnings as low (e.g. tariff, loss of China licence).</li>
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<div><strong>Chelsea Leadbetter, CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
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<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
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The a2 Milk Company Catalyst Check

NEUTRAL
Five key catalysts that have the potential to drive sentiment and/or performance for The a2 Milk Company (ATM) are currently negatively skewed, albeit likely to improve over the medium-term. The substantial re-basing of market expectations for ATM appears complete, however our mosaic of channel checks suggest we haven't turned a corner yet. ATM has a number of redeeming features (strong brand, net cash, attractive returns/free cashflow), however, an elevation in risks and a deterioration in industry dynamics have clouded the near-term picture. This is not lost on the market with a material de-rate in valuation to ~19x one year forward PE, cash-adjusted. However, at this juncture there is too much uncertainty to have conviction in a directional call, with risk/reward broadly balanced and catalysts still yet to show a turn in momentum. NEUTRAL.


What's changed?&nbsp;



Target price:&nbsp;NZ$7.15 (-5%) due to higher longer-term marketing forecasts and a slightly moderated&nbsp;daigou&nbsp;recovery path.



Catalyst watch&nbsp;— currently negatively skewed; albeit likely to improve in medium-term


Our catalyst watch falls into five buckets, driven by regular channel checks, industry discussions and data analysis. In aggregate they have deteriorated over the past two years, not helped by COVID-19.&nbsp;We expect FY21&nbsp;to be the bottom, albeit it will likely still take time to show a meaningful improvement.



#1. Consensus expectations:&nbsp;Very wide, capturing most feasible scenarios. If anything, we view medium-term consensus as slightly conservative.&nbsp;However, we don't expect this to be&nbsp;proven&nbsp;up in the near-term, with the backdrop still challenging to navigate
#2. Macro backdrop:&nbsp;Difficult, with no signs of pressure abating in the near-term. Taking a longer view, we expect government intervention to help with birth rates and a&nbsp;daigou&nbsp;recovery when borders re-open, albeit local competition is unlikely to abate
#3. ATM data points and anecdotes:&nbsp;Our mosaic of channel checks show no notable sign of a turnaround in English label momentum, as yet, not helped by some aged inventory still in the channel. Meanwhile, China label growth indicators remain in tact. We expect data points for English label to improve through 2H CY21
#4. ATM strategy review:&nbsp;We are not expecting any material shift in direction, albeit expect commentary/outcomes to likely be positive for revenue and negative for margins. We also believe capital management is likely
#5. Geopolitical risk: Heightened. Recent events are a reminder of the risk, which is largely unpredictable and unquantifiable. In ATM's case we view the key risk as being to investor sentiment, while see risk to earnings as low (e.g. tariff, loss of China licence).




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





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



A2 Milk Co Ltd

The A2 Milk Company: Catalyst Check