Get acquainted with ASX listed Dairy Sector Players: A2M, SM1

Summary

• Amid the continued uncertainty inducted by COVID-19 headwinds, numerous dairy sector entities have been an essential goods provider and have witnessed inflated demand for them worldwide.
• a2 Milk Company, recently, released its robust FY20 report reflecting revenue and earnings growth, which established its resilience during COVID-19 crisis. Notably, its bolstered balance sheet furnishes the opportunity to fund future growth and probable participation in manufacturing.
• In an update dated 28 May 2020, Synlait Milk lowered the 2019/2020 season’s forecast base milk price to NZ$7.05 kgMS from NZ$7.25 kgMS, and opening forecast for the 2020/2021 season is noted to be at NZ$ 6.00 kgMS.

Dairy industry is globalising extensively and contributing actively to the economy of numerous nations. Amid, the challenging situation created by the COVID-19 pandemic, the industry proved to be one of the crucial and essential product segments. It is a paramount part of the food system, globally and plays a pivotal role in the sustainability of rural communities particularly.

On that note, let us quickly discuss two ASX-listed dairy sector players in Australia, A2M and SM1.

The a2 Milk Company Limited (ASX:A2M)

A premium branded nutritional dairy entity, and a dual listed company (on both ASX and NZX) a2 Milk was engaged in talks with a New Zealand domiciled dairy nutrition entity, Mataura Valley Milk (MVM),recently, concerning exploration of options for A2M to take part in production at MVM’s facility in Southland, NZ.

Consequently, A2M made a non-binding indicative offer to secure a 75.1 per cent stake in MVM, for a total value worth ~NZ$270 million, established on an enterprise value of ~NZ$385 million. Further, MVM has consented to offer A2M a period of exclusivity to administer confirmatory due diligence and conclude definitive transaction documentation.

DO READ: a2 Milk Appoints David Bortolussi as New Managing Director and CEO

Financial performance

Lately, A2M unveiled its robust business performance with soared group revenue of 32.8 per cent to NZ$1.73 million for the financial year ended 30 June 2020 as compared to FY19.

The boosted performance of A2M reflected considerable resilience in the second half of FY20, conducting the business in the face of the COVID-19 headwinds.

Notably, some of the swelled revenue in its key segments/geography are as follows:

• Increase of 33.8 per cent (y-o-y) to NZ$1.42 million in the group infant nutrition segment;
• Upsurge of 91.2 per cent in the USA milk segment with the expansion of distribution to ~20.3 thousand stores; and
• Bolstered growth in the China label infant nutrition with doubled revenue to NZ$337.7 million, and distribution expanded across ~19.1 thousand stores.

A2M noted robust revenue and earnings growth in all addressable regions and key product segments.

Source: Company’s presentation, dated 19 August 2020

Other highlights of the accelerated financial performance of A2M for FY20 are as follows:

• The Company witnessed an upsurge of 32.9 per cent (y-o-y) in EBITDA and stood at NZ$549.7 million.
• Furthermore, A2M’s net profit after tax (NPAT) experienced a boosted y-o-y growth of 34.1 per cent to stand at NZ$385.8 million.
• The Group noted considerable increment of 45.1 per cent in the Marketing investment, targeting opportunities in both China, as well as the US.
• Cash balance was recorded of NZ$2 million, as on 30 June 2020.
• The Company noted a substantial increment of 33.5 per cent (y-o-y) in the Basic earnings per share (EPS) to 39 cents.

Do Read: The a2 Milk Company Raises its Stake in Synlait Milk

Owing to continued uncertainty caused by COVID-19, for FY21, the Company expects:

• EBITDA margin in the range of 30 per cent-31 per cent;
• Capex is projected to be NZ$50 million;
• Swelled marketing investment;
• Elevated costs related to raw material and packaging material, and

Stock Information: On 28 August 2020, a2 Milk last traded at AU$17.470, down by 3.052 per cent from its last close. A2M has a market capitalisation of AU$13.38 billion and total outstanding shares of ~ 742.26 million.

Did you read; Milk products and Infant Formula Stocks get a breather amid Global Health Crisis

Synlait Milk Limited (ASX:SM1)

SM1, a New Zealand based innovative and trusted dairy and a dual listed entity (on both ASX and NZX) on 21 August noted the announcement of its partner a2 Milk and stated that both the companies have a strengthened, long-standing, and complementary partnership.

Additionally, the Company is committed to its relationship with A2M, which is based on an exclusive long-term infant formula supply agreement for New Zealand, China, and Australia.

Furthermore, SM1 is well-placed to continue to aid and empower growth objectives of A2M via its immensely integrated infant formula manufacturing capabilities that meet China’s high standards.

Also Read: The a2 Milk Company Raises its Stake in Synlait Milk

In an update dated 29 June 2020, SM1 announced that it joined B Corp™ community and became a Certified B Corporation™ (B Corp™). B Corp™ is an international community of for-profit leaders vowing to utilise business as a force for good.

Furthermore, on 28 May 2020, SM1 advised that it had updated its forecast base milk price for the 2019/2020 season to NZ$7.05 kgMS from NZ$7.25 kgMS.

Leon Clement, CEO of SM1, stated that that the decision of reduction in the forecast base milk price for the 2019/2020 season was in line with other commodities. Moreover, dairy prices have eased considerably this year, resulting in lower than the anticipation done while setting forecast in January 2020.

Furthermore, SM1’s opening forecast for the 2020/2021 season is NZ$6.00 kgMS.

SM1 would continue monitoring movements and would further keep its farmer suppliers informed.

Notably, the Company’s final milk price for the 2019/2020 season would be confirmed in SM1’s full-year 2020 result in September 2020. Forecast for the 2020/2021 season would also note an update.

Stay tuned for SM1’s full-year earnings update for the year ended 31 July 2020 on 28 September 2020.

Stock Information: On 28 August 2020, SM1 last traded at AU$5.680, down 3.237 per cent from its last close. SM1 has a market capitalisation of AU$1.05 billion and total outstanding shares of ~179.31 million.

Good read; Dairy Sector Players Resilient Amid COVID-19: SM1, A2M, KTD