3 Growth Drivers For Value Dairy Stocks- Synlait, A2 Milk, Bellamy's

  • December 02, 2019 04:02 PM AEDT
  • Team Kalkine
3 Growth Drivers For Value Dairy Stocks- Synlait, A2 Milk, Bellamy's

Australia is the world’s third-largest dairy exporter, with exports accounting for approximately 50% of the production, according to a report, The Australian Dairy Industry from PwC. There are nearly 38,000 people employed in the Australian dairy industry, which generates nearly $13.7 billion across the whole supply chain.

The dairy industry in Australia is concentrated in the south-east of the country, and the largest dairy production state is Victoria. A range of products which includes milk powder, yoghurt, milk, cheese and butter are produced by the Australian dairy industry. The key export markets for Australia’s dairy industry are Japan, China, Middle East and South East Asia

The agriculture industry in Australia provides investors with tremendous opportunities to take part across the breadth of the sector from the industries that are continuously supporting primary production and into exporting, processing, retailing and marketing. It also offers investors exposure to a strong and essential part of the Australian economy. The Australian dairy industry has established itself as an essential component of the agriculture sector of Australia over decades.

The three key drivers that could impact growth in the Australian dairy industry are:

Global Demand: Demand for dairy products is growing at a robust pace across the globe. Exports to Greater China is continuing to drive this demand growth.

Exchange Rates: Fluctuations in exchange rates impact the cost competitiveness of Australian exports.

Australian market: Demand for varied dairy products in the domestic market have a huge impact on the Australian dairy industry.

Let us have a look at three ASX listed dairy stocks- SM1, A2M and BAL.

Synlait Milk Limited (ASX: SM1)

New Zealand headquartered dairy processing company, Synlait Milk Limited (ASX: SM1) provides nutritional milk products, globally. The company employs 700 people, who are working with approximately 200 milk suppliers and offering the best in milk nutrition for the customers. The company processed its first milk in August 2008 in its new manufacturing plant. In 2017, the company acquired Auckland-based New Zealand Dairy Company and expanded its business.

Subordinated Fixed Rate Bonds

On 29 November 2019, the company unveiled about the processing of an offer of up to NZ$150 million of five-year unsecured subordinated fixed-rate bonds, which would mature on 17 December 2024.

It is expected that, with the bonds quoted on the NZX Debt Market, the offer to New Zealand institutional and retail investors, would open on 9 December 2019 and close on 13 December 2019

Synlait has announced that the indicative margin range above the five-year swap rate for the bonds is 2.50% to 2.70% per annum, subject to a minimum interest rate of 3.70% per annum. Following a bookbuild process, which is likely to be completed on 6 December 2019, an announcement of the interest rate for the bonds would be made.

In the subordinated bond offer investor presentation, the company also highlighted its financial performance for FY2019 (year ended 31 July 2019).

  • The company’s revenue exceeded NZ$1 billion in the fiscal year 2019 for the first time, up by 17% to NZ$1,024.3 million.
  • Net profit after tax for FY2019 was noted at NZ$82.2 million, which is up by 10% year on year.
  • Operating cash flow of the company increased by 39% to NZ$136.7 million.
  • Synlait’s consumer packaged infant formula sales continue to grow, up by 21% to 42,907 MT.
  • The company completed Talbot Forest Cheese acquisition on 1 August 2019.

Subordinated Fixed Rate Bonds

Stock Performance

On 2 December 2019 (AEST 02:38 PM), Synlait’s stock was trading at $ 8.945, up by 0.959%, with a market capitalisation of $1.59 billion. SM1 has approx. 179.31 million outstanding shares trading on ASX. The PE ratio of the stock stands at 20.170x. The stock has delivered a positive return of 3.75% on a year to date basis and a negative return of 0.11% in the last six months.

The a2 Milk Company Limited (ASX: A2M)

Infant formula company, The a2 Milk Company Limited (ASX: A2M) was founded in 2000 in New Zealand by Dr. Corran McLachlan and is engaged in commercialising A1 protein-free milk under the a2 and a2 MILK brands. The company also operates in the United States, Vietnam, Korea, Singapore and China.

Extension of Supply Agreement with Synlait

The supply agreement between A2M and Synlait, which is for a2 Platinum® and other nutritional products, has been extended for two years. This agreement was announced on 3 July 2018 for a minimum five years term. The key highlights of the revised agreement are-

  • The extension of term of the agreement for two-year, strongly provide for a new minimum time, at the earliest, to 31 July 2025.
  • The volume of nutritional products having exclusive supply rights of Synlait, would increase.
  • Increase in production capacity from Synlait.
Annual General Meeting Presentation

The company released its annual general meeting (AGM) presentation, highlighting the key financials and outlook of the company-

  • Group revenue reported at NZ$1,304.5 million for the fiscal year 2019.
  • Group EBITDA of the company for FY2019 was recorded at NZ$413.6 million.
  • Basic EPS (earnings per share) of A2M stood at 3 cents.

Outlook- For the fiscal year 2020, the company would focus on the strong revenue growth across its key regions in the United States and China. For supporting its in-market execution, the company would also focus on the development of the capability and infrastructure.

a2 Milk expects a stronger EBITDA margin per cent than the previously communicated and could be in the range of 29-30% with gross margin driven by improved price yield and reduction in COGS.

For the first half of the financial year 2020, the company expects revenue of NZ$780 million to NZ$800 million.

Stock Performance

On 2 December 2019 (AEST 02:49 PM), A2M’s stock was trading at $15.000, up by 1.557%, with a market capitalisation of $10.87 billion. The company has approx. 735.88 million outstanding shares trading on ASX, with 52 weeks high price of $17.300 and 52 weeks low price of $9.490. The PE ratio of the stock stands at 39.370x. The stock has delivered a positive return of 42.02% on a YTD basis.

Bellamy’s Australia Limited (ASX: BAL)

ASX listed organic brand, Bellamy’s Australia Limited (ASX: BAL) provides a variety of Australian-made and certified organic food products/formula for toddlers and babies. The company is the number one organic brand in Australia and offers approximately 40 customised products according to the needs of babies and toddlers.

AGM Presentation

The company released its annual general meeting presentation for FY2019 (year ended 30 June 2019). Following are some of the highlights from the presentation.

  • For the fiscal year 2019, the net revenue of Bellamy’s decreased to $266 million, and normalised EBITDA was noted at $47 million. This decrease was impacted by a lower birth rate and increased competition for Chinese demand.
  • Several positive initiatives in FY2019 could provide a better growth to the company in FY2020:
    • The launch of new products- Bellamy’s organic ultra-premium and organic goat formula.
    • The launch of a China offline food range.
    • Joint business plans with key e-commerce and social platforms in China.
    • The expected re-entry into the China offline formula channel and strong trade interest in the brand.

AGM presentation

Source: AGM presentation

FY20 Financial Outlook
  • The company is expecting group revenue to grow 10-15% in FY2020, compared with the prior year.
  • Growth anticipated to boost in the second half of 2020 with new product launches.
  • Group EBITDA margin of the company is expected to be consistent (with prior year) in FY2020.
Stock Performance

On 2 December 2019 (AEST 02:51 PM), the company’s stock was trading at $13.170, with a market cap of $1.49 billion. The company’s stock has a P/E ratio of 67.500x. With 113.37 million outstanding shares trading on ASX, the stock has a 52 weeks high price of $13.220 and 52 weeks low price of $6.710. The year to date return of the stock stands at 73.52%.


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