Yovich & Co. Market Update - 19 June 2017

Jun 19, 2017 | Commentary

Market Themes

Changes in Market



  • Over the past four weeks the New Zealand Market has reached fresh highs, as investors took confidence from a budget that was prudent but politically savvy by being supportive to low income earners in an election year.
  • a2 Milk (ATM.nz) was the best performing stock on the NZ Market over the past month, closely followed by Air New Zealand (AIR.nz) , Fisher & Paykel Healthcare (FPH.nz), Restaurant Brands (EBD.nz) and Xero (XRO.nz).
  • The failure of Theresa May to secure a majority on the UK election has provided further uncertainty to UK and European markets.
  • In The United States, the recent rally in Tech stocks reversed and the boarder Dow Jones index significantly outperformed the NASDAQ index.
  • The stability of the budget and the NZ Economy has seen the Kiwi dollar strengthen against both the Aussie and US dollars.

Investment News

The a2 Milk Company (ATM.nz)

In the current market where quality stocks have extended valuations, it becomes very difficult to find value. Genuine growth companies like ATM are providing real increases in earnings and valuations that continue to fundamentally move upwards. Here is a summary of their business from IRESS:

The a2 Milk Company Limited was founded in February 2000 on a simple, yet profound, discovery that different cows produce different milk proteins that behave differently in people’s bodies. Milk that is naturally rich in the A2 beta-casein protein (and free from all A1 beta-casein protein) has been found by many to be easier to digest. The a2 Milk Company single-mindedly pioneers scientific understanding, operational know-how and commercialisation of premium a2 Milk products around the world. Today, we have a range of products available in Australia, New Zealand, UK and China, with further expansion planned.

ATM have created a new market and their recent result has surprised everyone, including themselves, at how strong their revenues are increasing. Here are a few comments from the latest research from First NZ Capital:

On the back of a revised production schedule with the company’s infant formula contract manufacturer and ongoing strong demand for its product, ATM has raised its previous NZ$525mn revenue guidance to NZ$545mn compared with our NZ$534mn pre-trading update forecast for FY17F. The increased production and delivery of this IF stock by ATM to its distributors is a signal of the ongoing strong and previously unsatisfied demand in the market for its products. It is also an indication that the economic incentives on ATM’s IF remain attractive to its channel partners in the market. Coupled with changes in the phasing of the company’s marketing spend in China, we have upgraded our EBITDA forecast by 8% in FY17F. The risk to our earnings forecasts in FY18F and FY19F remains to the upside driven by a combination of potential volume growth as well as higher gross margin. We maintain our OUTPERFORM rating with a revised NZ$4.10 Target Price.

ATM’s A1/A2-type milk hypothesis and digestive benefit claims, coupled with its suite of patents and trademarks have provided the company with a marketing platform for premium-priced differentiated products. Our view on ATM is premised on successful rollout of the company's A2-type-based dairy products (including IF) in Australia, the UK, the US and China markets. Key to this is the successful management of channels-to-market and of regulatory changes over time.

Financials & Forecasts

Disclaimer: This publication has been prepared for your general information. While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken for any errors or omissions. This publication does not constitute financial or insurance product advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. No part of this publication may be reproduced without prior written permission from our company. Disclosure statements relating to the financial advisers associated with this newsletter are available on request and free of charge either electronically or from our offices in Whangarei and Dargaville.

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About the author

Jarrod Goodall

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