Dairy Sector Players Under Focus - KTD, A2M, BAL

Consumer Staples Sector

Consumer staples are essential products, such as food, household goods, beverages, and hygiene products. Items like pharmaceutical drugs, alcohol and tobacco also come under consumer stables. These products are usually considered to be non-cyclical, implying that they are in demand throughout the year and impervious to business cycles (fluctuations in the economy).

Sometimes, the consumer staples sector is also termed as the consumer defensive sector. This sector includes businesses that are less sensitive to economic cycles. It is perhaps due to this characteristic that investors who are risk-averse and seeking consistent growth, solid dividend and low volatility are always looking to choose stocks in the consumer staples domain.

Australian Dairy Sector

The dairy sector is among the most important agricultural industries in Australia, generating around A$13 billion across the complete supply chain. Directly, the sector employs approximately 39,000 people, including in production processes and on dairy farms. Some key facts about the Australian dairy market are

• The Australian dairy market ranks fourth in total trade volume, accounting for a 7 per cent share in the global market
• Dairy exports are valued at around A$2.7 billion every year
• Of the total dairy production, around 40 per cent is exported to different parts across the globe
• Key dairy export markets for Australia are Japan, China, South East Asia and the Middle East

The S&P/ASX 200 Consumer Staples Index was trading at 12,597.5, down 0.44 per cent, while the benchmark index S&P/ASX 200 was also trading downward by 0.04 per cent to 6,747.0 on 24 September 2019 (AEST 12:02 PM) from its previous close. Let us discuss recent updates of few emerging players in the Australian dairy space, including Keytone Dairy Corporation Limited, The A2 Milk Company Limited and Bellamy's Australia Limited.

Keytone Dairy Corporation Limited

Keytone Dairy Corporation Limited (ASX: KTD) operates in the dairy product segment of the FMCG industry. The company is engaged in the manufacturing and supply of its own brands of high-quality dairy and nutritional powdered dairy products. The products of the company are manufactured under the brand names - KeyDairy®, FaceClear® and KeyHealth®. KTD also offers award-winning beauty products that are made available in multi-form packaging solutions, which comprise of nutrition sachet and jar products.

Another Walmart China Order

On 23 September 2019, the company updated the market regarding securing second order from Walmart China for delivering private label whole and skim milk powders to Sam’s Club

West, Inc. (China). The second order received by the company is higher in value as compared to the first order, which was announced to the market on 11 September 2019. The total value of these two orders from Walmart China is approximately NZ$1 million.

KTD Chief Executive Officer (CEO), Mr Danny Rotman, commented on the contracts, stating that the two orders from Walmart China in a short span of time validates the quality, product and manufacturing credentials of the company, as well as highlights the size of the Walmart China operation.

Super Cubes’ Strategic Acquisition

On 18 September 2019, KTD announced to have executed a binding agreement for strategically acquiring the assets, brands and businesses of 40Forst Pty Limited, which trades under the brand name of Super Cubes. It is an Australia-based lifestyle health and wellness brand.

Keystone would fund the acquisition via cash reserves and issue of equity with no capital raise needed. The transaction acquisition is a multiple of 1.4x FY21F EBITDA, and its completion is expected to occur in the short term, subject to the satisfaction of conditions precedent. The strategic acquisition would accelerate the growth of KTD in high value and high margin proprietary products.

Tonik Deal with EzyMart

According to another market update on 17 September 2019, the company’s wholly owned subsidiary, Omniblend Pty Ltd obtained ranging in EzyMart convenience stores for its proprietory functional lifestyle beverages, namely Tonik. EzyMart operates in Australia with over 200 stores across four states.

Stock Performance

The stock of KTD was trading at A$0.500 on ASX on 24 September 2019 (AEST 12:03 PM), down by 5.66 per cent from its previous closing price. The company has a market cap of A$114.01 million and approx. 215.12 million outstanding shares. The 52-week high and low value of the stock is at A$0.700 and A$0.320, respectively. The stock has generated a positive return of 41.33 per cent in the last six months and 37.66 per cent on a year-to-date basis.

The A2 Milk Company Limited

The A2 Milk Company Limited (ASX:A2M), founded in New Zealand, is an infant formula company that targets to bring the A2 protein type in its branded milk. The company, offering nutritional products, serves markets including Australia, New Zealand, Greater China and the United States.

Organisational Update

On 23 September 2019, the company announced that its Chief Financial Officer, Craig Louttit, decided to step back from the role of Chief Financial Officer, as he intends to spend more time with the family. Mr Louttit would continue to serve the company as Deputy Chief Financial Officer, thereby playing a senior and integral role. Owing to his decision, Mr Race Strauss would be joining the company as its Chief Financial Officer in the second half of FY2020.

Meanwhile, on 17 September 2019, A2 Milk Company unveiled that UBS Group AG and its related bodies corporate ceased to be a substantial holder of the company. The number of shares held before and after ceasing is 37,009,432 and 36,509,870, respectively.

Additionally, on the same day, the company also published its Investor Strategy Day Presentation.

Financial Highlights - FY2019

• Total revenue increased by 41.4 per cent to NZ$1,304.5 million compared to the last financial year
• EBITDA grew by 46.1 per cent to NZ$413.6 million
• Basic earnings per share increased by 45.4 per cent to 39.25 per cent per share
• Net Profit after tax improved by 47.0 per cent to NZ$287.7 million

FY20 Outlook

For the fiscal 2020, the company is expecting to register growth in revenue numbers across key regions, aided by growing brand and marketing activities in China and the United States. Additionally, A2M anticipates earnings before interest, tax, depreciation and amortisation (EBITDA) for FY2020 to be in line with the EBITDA margin of the second half of FY2019 of 28.2 per cent. Moreover, the FY2020 gross margin percentage is expected to be consistent with the last year.

Stock Performance

The stock of A2M was trading at A$12.360 on ASX on 24 September 2019 (AEST 12:04 PM), down by 2.138 per cent from its previous closing price. The company has a market cap of A$9.29 billion and approx. 735.17 million outstanding shares. The 52-week high and low value of the stock is at A$17.300 and A$08.140, respectively. The stock has generated a negative return of 5.32 per cent in the last six months and a positive return of 21.44 per cent on a year-to-date basis

Bellamy’s Australia Limited

Bellamy’s Australia Limited (ASX: BAL) is engaged in the sale, supply and distribution of organic food and formula products for kids and toddlers. Its products are made available in supermarkets, selected independent stores and selected pharmacies, as well as online platforms.

Change in Company Holdings

Recently, BAL unveiled changes to holdings in the company. Some of them are

• UBS Group AG and its related bodies corporate ceased to be a substantial holder
• Voting power of Morgan Stanley and its subsidiaries changes from 6.39 per cent to 5.12 per cent
• On behalf of Credit Suisse Group AG and its affiliates, Credit Suisse Holdings (Australia) Limited ceased to be a substantial holder
• Mitsubishi UFJ Financial Group, Inc. became a substantial holder, with a voting power of 5.59 per cent

FY2019 Financial Summary

• Gross margin of the company increased by 5%, driven by price and input costs
• BAL continued to maintain zero debt
• Net revenue stood at A$266 million, impacted by CBEC regulation and a loss of A$18 million in China label series
• Group cash balance increased by A$25 million to A$112 million

Group revenue is anticipated to register an increase of 10-15 per cent year-on-year in FY2020, while group EBITDA in FY2020 is likely to be consistent with FY19.

Source: Company’s Report

Stock Performance

The stock of BAL was trading at A$12.875 on ASX on 24 September 2019 (AEST 12:05 PM), up by 0.039 per cent from its previous closing price. The company has a market cap of A$1.46 billion and approx. 113.37 million outstanding shares. The 52-week high and low value of the stock is at A$13.030 and A$6.710, respectively. The stock has generated a positive return of 19.17 per cent in the last six months and 69.57 per cent on a year-to-date basis.

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