Are Bellamy's And A2 Milk Co. Ltd A Good Punt

  • Apr 02, 2019 AEDT
  • Team Kalkine
Are Bellamy's And A2 Milk Co. Ltd A Good Punt

Bellamy’s Australia Limited (ASX: BAL)

Bellamy’s Australia Limited (ASX: BAL) is a leading brand in the business of organic food and formula products for babies and toddlers, which are all Australian-made and certified organics. It offers 30 products catering to the needs of babies and toddlers.

The company has adopted a few changes to establish a more sustainable business model and to revamp profit. These changes include – (a) consolidation in sales and distribution channel, leading to a stable trade pricing and margins and strong price realisation; (b) diversification in ingredient procurement; (c) restructuring of logistics network to minimize the cost and inventory position; (d) higher investment in marketing and brand building, marketing expenditure shifted to integrated brand campaigns from low ROI agency retainers and media; (e) other initiatives for future growth – establishment of a food business unit, pending application for SAMR registration, Vietnam market entry, etc.

Financial Performance- Initiatives taken by the company has resulted in the improved profitability and strong balance sheet. Bellamy’s recorded revenue of $328.7 million in FY18 as compared to $240.2 million in FY17, posting a growth of 37% Y-o-Y. The whooping revenue growth was largely on account of higher volume growth and an $8.7 million contribution from the Camperdown manufacturing business. The core business revenue growth (excluding Camperdown business) came in at $320 million in FY18 against $240.2 million in FY17. Higher gross profit margins for FY18 of 39.6% (vs 38.1% in FY17) was led by 2H FY18, which witnessed robust margins of 42.5% on account of lower cost of goods sold from improved ingredient purchasing and manufacturing arrangements. Core business EBITDA came in at 22.6% in FY18 as compared to 17.8% in FY17.

For 1H FY19, BAL achieved revenue of $129.6 million against $174.9 million in 1H FY18. EBITDA for the same period came in at $26 million (vs $ 34.9 million in 1H FY18).

Given the further delay in SAMR (State Administration for Market Regulation) registration, management guides for FY19 – (a) group revenue in the range of $275 million - $300 million (b) normalised group EBITDA to be in the range of 18%-22%.

Meanwhile, the share price has risen 51.52% in the past three months as on April 01, 2019. BAL’s shares traded at $11.260 (down 2.087% intraday) with the market capitalisation of circa $1.3 Bn as of April 02, 2019.

The a2 Milk Company Limited (ASX: A2M)

The a2 Milk Company Limited (ASX: A2M) focuses on producing, marketing and selling premium branded A1 protein free dairy nutritional products in targeted global markets. Products of A2M completely focuses on the A2 beta-casein protein type.

Looking at its presence, ANZ (Australia and New Zealand) business recorded a market share of 10.8% in FY18, and China business reported a market share position of 5.4% in FY18 from 4.7% n FY17.

Financial Health- All the key product segments – infant formula, liquid milk and milk powder have seen higher investment as far as branding, marketing and organisational capability is concerned which has resulted in strong sales numbers across the segments.

Revenue for 1H FY19 came in at $613.1 million as compared to $434.7 million in 1H FY18, recording a strong growth of 41% Y-o-Y, reflecting healthy growth across key regions. Group EBITDA came in at $218.4 million in 1H FY19, reporting a growth of 53% (Y-o-Y).

Looking at the business segments, the ANZ business has performed well in 1H Y19 with revenue at $418.4 million (37.5% growth Y-o-Y) and EBITDA at $192 million (growth of 64.9%). The Australian fresh milk further strengthened and recorded a Y-o-Y growth of 11.7% in 1H FY19. a2 Platinum infant formula remains the market leader with a market share of 35.7%, up from 32% in FY18.

Considering a strong first half performance of FY19 and increasing market share in China, A2M is placed in a better way to payback the benefits of scale into increased marketing activities in the second half, which is expected to be continued into FY20. Management expects marketing investment in 2H FY19 to be approximately doubled compared to 1H FY19, resulting in an adverse impact on EBITDA margins in the same period with full-year EBITDA margins to be in the range of 31% to 32% in FY19.

Meanwhile, the share price has risen 31.44% in the past three months as on April 01, 2019. A2M’s shares traded at $14.010 (up 2.487% intraday) with the market capitalisation of circa $10.03 Bn as of April 02, 2019.


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