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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

The a2 Milk Company Short-Term Pain? Digesting&nbsp;Daigou&nbsp;Disruption

OUTPERFORM
The a2 Milk Company's (ATM) trading update is a blemish to its consistent track record of profit growth, with the company signalling a revenue decline in 1H21 as a result of major disruption to the&nbsp;daigou&nbsp;channel. The key question now — is this a temporary issue, or something more permanent? Although there is a lot we still don't know (not uncommon with ATM), we view this as temporary. While the short-term pain is worse than anticipated, this appears to be a one channel, one product problem (admittedly its most material), with other areas still growing strongly and meaningful growth avenues remaining.


Key changes



EBITDA revisions:&nbsp;FY21E -11%, FY22E -7%, FY23E -5%. Solely due to lower revenue growth assumptions through&nbsp;daigou. We have assumed a return to growth in&nbsp;daigou&nbsp;in FY22, albeit not fully recovering to where it was, hence modest medium-term downgrades.
Target price:&nbsp;Revised to NZ$23.00, due to earnings revisions and a lower share price for its stake in&nbsp;Synlait&nbsp;Milk.



ATM FY21 guidance points to a game of two halves, with the 1H weakness meaningfully worse than anticipated


ATM provided FY21 revenue guidance (NZ$1.8–1.9bn; +4% to +10%&nbsp;YoY) meaningfully below our (and market) expectations. This incorporates a very weak 1H21 (-4% to -10%), albeit a return to strong growth in 2H21.&nbsp;This leaves a number of questions, namely:



What is the problem? ATM has referenced IF demand weakness in its Australasian segment, predominantly due to a decline in retail and corporate daigou as a result of COVID-19 related issues (lack of tourists, international students and lockdowns). These themes are not new, albeit the magnitude negatively surprised. The key acceleration in the issue appears to have been the lockdown in Victoria, which has limited the incremental demand from corporate daigou for replenishment inventory. We understand the weakness is less pronounced in New South Wales, although this is difficult to verify.
What is ATM doing about it?&nbsp;Running a range of&nbsp;daigou&nbsp;incentive programmes and ATM recently hosted a live streaming event.
What does guidance incorporate for&nbsp;daigou?&nbsp;No specifics provided, however, ATM indicated it includes disruption for the balance of 1H21 and&nbsp;stabilisation/some improvement thereafter. What actually plays out is contingent on&nbsp;daigou&nbsp;response to&nbsp;ATM's&nbsp;efforts, and may also be influenced by government restrictions.&nbsp;ATM's&nbsp;assumptions do not appear unreasonable. A&nbsp;daigou&nbsp;recovery is also not inconceivable (things can change quickly) but we believe the channel is unlikely to ever return to its prior peak.
EBITDA margin implications from the substantial channel shift signalled:&nbsp;No. ATM updated its guidance to ~31% (prior 30–31%) helped by some cost initiatives, improved input prices and the release of an inventory provision (conservatively taken in FY20).
Is this indicative of a more permanent issue? Not in our view. ATM signalled its 2H21 budget is broadly unchanged (with some mix differences), brand health metrics are at record levels (including awareness, purchase intent and loyalty) and other channels continue to deliver strong growth (China label year-to-date revenue to August up +77%). The latter remains particularly encouraging given the large offline channel is the key medium-term growth avenue for ATM (market share is growing through Mother &amp; Baby Stores, however at c. 2% there remains ample runway for growth to continue over the medium-term).




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





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



The A2 Milk Company: Short-Term Pain? Digesting Daigou Disruption

A2 Milk Co Ltd

The A2 Milk Company: Short-Term Pain? Digesting Daigou Disruption