16 February 2019
Food & Beverage
a2 Milk and Synlait
outlined in recent notes, we have already sliced our initial bullish expectation and
don’t expect any meaningful revenue until FY20.
Target price changes - ATM +20% to NZ$15 and SML +5% to NZ$10
We have lifted our ATM growth forecasts to reect three key factors: (1) greater
China regulatory certainty, (2) higher US fresh revenues to reect the growing
distribution points and strong ATM marketing investment and (3) explicitly
modelling a US adult nutrition opportunity (logical leverage point to US fresh). As
a result of our earnings upgrade (FY19-23E NPAT c.6% pa, longer term +10% pa
(US adult nutrition)) plus time value of money, our DCF-based TP is now +20%
to NZ$15.0 (avg. WACC 8.6%, RFR 4.5% and TGR 3%). Key down risks: (1) food
quality / safety issue, (2) regulatory disruption, and / or (3) mgmt. execution of
growth options (refer report for further details).
Our SML TP +5% to NZ$10 (avg. WACC 8.4%, RFR 4.5% and TGR 2%) reects
time value of money. Our earnings track is unchanged with higher near term ATM
volume oset by weaker other IFC brand performance, mainly Munchkin. Key
down risks: (1) regulatory changes, (2) food safety incident and/or (3) execution
of capital expansion plans (refer report for further details).
Page 2Deutsche Bank AG/Sydney
16 February 2019
Food & Beverage
a2 Milk and Synlait
Strong daigou nish to 1H19
Key 1H19 group metrics
■We are expecting total 1H19 revenue of NZ$609mn and +40% on pcp.
The key swing factors are within the infant business and specically
inventory build / sell down, which our analysis of recent port data
suggests is +/- c. NZ$20mn and results in a revenue range between NZ
$589mn to NZ$629mn, or +35% to 45% growth on pcp.
■Moreover, our 1H sales estimate implies a strong Nov / Dec monthly
revenue run rate of +39% on pcp to NZ$120mn and relative to Jul –
Oct-18 (4M19) run rate of NZ$92mn and +41% on pcp.
■Divisionally, we are expecting: (1) infant formula revenue to print +47%
on pcp to +NZ$500mn and underpinned by our analysis of recent port
data prints and daily online web scraping analysis (detailed in sections
below), (2) ANZ fresh sales +12% on pcp to NZ$95mn, and (3) US / UK
+57% on pcp to NZ$13.5mn (note excluding DBe NZ$15mn of UK infant
sales).
■Our other key areas of focus are: (1) MBS roll-out and through its China
label % of total IF sales (DBe +3pp on FY18 to 15%), (2) China Kantar
market share (DBe +0.2pp on 1Q19 MAT to 5.8%), and (3) U.S. fresh
business KPIS (e.g. distribution footprint growth and sales velocity)
■At the EBITDA line we are expecting NZ$200mn, +40% on pcp and
margin broadly at on pcp at 33%.
Strong infant formula momentum through Nov / Dec-18
■NZ Stats port data indicates a lift in infant formula volumes through
Nov / Dec-18 – our analysis of Lyttleton port data suggests that following
its 4M19 sales update, infant momentum looks to have remained very
strong through Nov / Dec-18 and with total stage 1 – 3 volumes lifting
+79% on pcp to 8.2k MT and to lift the total 1H19 to 17.8k MT and +30%
on pcp (data adjusted for revenue recognition timing).
■Moreover, on an underlying country mix basis the Nov / Dec-18 port data
highlights: (1) Australian volumes remain very strong, +137% on pcp to
4k MT and we expect this reects strong corporate daigou demand given
on-going grocery / pharmacy stock-out issues, and (2) China / Hong Kong
volumes also tracking very strong and +43% on pcp to 4.1k MT.
Deutsche Bank AG/SydneyPage 3
16 February 2019
Food & Beverage
a2 Milk and Synlait
Figure 1: NZ Stats data indicates strong IF momentum
through Nov / Dec-18….
Figure 21,000
2,000
3,000
4,000
5,000
Apr
-16
Jun
-16
Aug
-16
Oct
-16
Dec
-16
Feb
-17
Apr
-17
Jun
-17
Aug
-17
Oct
-17
Dec
-17
Feb
-18
Apr
-18
Jun
-18
Aug
-18
Oct
-18
Dec
-18
Lytt
leto
n po
rts
tage
1 -
3 vo
lum
e (M
T)
AustraliaChinaHong KongDunsandel capacity3-mth rolling avg.
0.0k
2.0k
4.0k
6.0k
8.0k
10.0k
12.0k
1Q172Q173Q174Q171Q182Q183Q184Q181Q192Q19
Lytt
leto
n po
rt da
ta s
tage
s 1
-3 (
MT)
AustraliaChinaHong Kong
Source: NZ StatsSource: NZ Stats
■Our online daily analysis of individual daigou (via Taobao) also suggests
strong trading through Nov / Dec-18, however that being said inventory
levels look to have remained low following the label transition period
through ATM’s 4Q18. Taking into consideration the strong Australian
port volumes, along with our analysis of Australian grocery / pharmacy
which continues to show Coles, WOW and Chemist Warehouse remain
short of stock, we suspect: (1) the majority of ATM product has been
through corporate daigou sales channels (e.g. not captured in our Taobao
analysis), and (2) potentially inuenced by recent e-commerce tax and
business registration requirements set to be enforced from 1 April-19.
Figure 3: ...given that our daily online analysis of
individual daigou indicates retail stock levels remain
tight...
Figure 4
0k
5k
10k
15k
20k
25k
30k
0k
100k
200k
300k
400k
Sep
-17
Oct
-17
Nov
-17
Dec
-17
Jan
-18
Feb
-18
Mar
-18
Apr
-18
May
-18
Jun
-18Jul-18
Aug
-18
Sep
-18
Oct
-18
Nov
-18
Dec
-18
Jan
-19
Feb
-19
Tao
bao
tran
sac
tion
s
Stage 1Stage 2Stage 3Avg. daily inv. (rhs)
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
May
-17
Jun
-17Jul-17
Aug
-17
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Nov
-17
Dec
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-18
Feb
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Apr
-18
May
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Jun
-18Jul-18
Aug
-18
Sep
-18
Oct
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Nov
-18
Dec
-18
Jan
-19Individu
al d
aigo
u m
argi
n (1
0-da
y ro
lling
avg
.)
Stage 2Stage 312-month avg.12-month avg.
Stock-out
issues
Market long supply
& label transition
Margin
recovery
Source: Taobao, Deutsche Bank estimatesSource: Taobao, Coles, Deutsche Bank estimates
Total 1H19 infant formula sales growth between +41 to 52% on pcp
We expect ATM should deliver 1H infant formula revenue between NZ$480 -
$520mn, or +41 to 52% growth on pcp and +47% at the midpoint – key points
below:
■We estimate ATM’s total infant formula volume over the 1H19 was 18.5k
MT and reecting: (1) NZ Stats export data for stage 1 – 3 product
(adj. for ATM revenue recognition timing) which indicates 17.5k MT was
exported through Lyttleton, (2) our assumption that stage 4 product mix
Page 4Deutsche Bank AG/Sydney。