The a2 Milk Company Limited (NZSE:ATM)’s outlook is one of buoyant sentiment as it continues to post exciting top-line revenue growth. Over the past three months, the share price has been relatively stable, hovering at NZ$9.70 the time of publishing. ATM has been on my radar for the past couple of months as I came across another article on the company’s CEO, Ms. Jayne Hrdlicka. Today I will touched on some key aspects you should know on a high level, around its financials and growth prospects going forward.
First, a short introduction to the company is in order. The a2 Milk Company Limited, together with its subsidiaries, commercializes A1 protein free branded milk and related products in Australia, New Zealand, China, other Asian countries, the United Kingdom, and the United States. Started in 2000, it operates in New Zealand and is recently valued at NZ$7.1b.
The company is growing incredibly fast, with a year-on-year revenue growth of 68% over the past financial year , and a bottom line growth of 116%. Over the past five years, revenue has increased by 47%, congruent with larger capital expenditure, which most recently reached NZ$3m. ATM has been reinvesting more into the business, leading to expected return on investment of 36% in the next three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to NZ$270m in the upcoming year, and over the next five years, earnings are expected to rise at an annual rate of 19% on average, compared to the industry average rate of 19%. These figures illustrate ATM’s strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.
Investors tend to get swept up by a company’s growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. With zero-debt on its balance sheet, ATM doesn’t have to worry about maintaining a high level of cash to meet debt obligations and paying near-term interest costs. These constraints can be a burden for high-growth companies as it prevents them from reinvesting cash from operations back into the business to fuel further growth. The value of financial flexibility may outweigh the benefit of lower cost of capital for ATM, which debt funding usually provides compared to issuing new equity. However, the company has plenty of headroom for borrowing, and the expected growth, to have debt funding as an option in the future. ATM has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. A reason I like ATM as a business is its low level of fixed assets on its balance sheet (10% of total assets) . When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. ATM has virtually no fixed assets, which minimizes its downside risk.
ATM is now trading at NZ$9.70 per share. At 736.3 million shares, that’s a NZ$7.1b market cap – quite low for a business that has has a 5-year free cash flow cumulative average growth rate (CAGR) of 47% (source: analyst consensus). With an upcoming 2018 free cash flow figure of NZ$232m, the target price for ATM is NZ$13.12. This means the stock is currently trading at a meaningful 26% discount. However, comparing ATM’s current share price to its peers based on its industry and earnings level, it’s overvalued by 69%, with a PE ratio of 35.92x vs. the industry average of 21.25x.
ATM is a stock with outstanding fundamental characteristics. I like the company because of the growth story, the possibility that it is yet to be factored into the share price, and the strong capital management. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.
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