A2M 1.62% $13.38 the a2 milk company limited

Long-term investors

  1. 54 Posts.
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    I started this thread for long-term investors because a lot of focus seems to be on short-term. I don't want to sound flippant but for long-term holders the SP should be of little concern. This stock will whipsaw on announcements more than most but as always it comes down to interpretation. Here is my understanding of the current situation.

    The Strategy

    We all know a2MC has no debt and operates off a light framework so there is little reason for them to hold a substantial amount of cash on hand. As we look forward there are currently strong opportunities, particularly in China and US, to increase market share with potential for additional markets and products at a later date. However even though they are the pioneers of A2, there is not an unlimited amount of time for them to act before they lose the opportunity to competitors. Nestle may have failed in their first attempt but that doesn’t mean a2MC should ignore the threat. Therefore, the accelerated growth strategy that the company is implementing is far superior long-term compared to dividends or more conservative approaches. The problem is there are pros and cons for investors.

    The Cost of Information

    Any business going through an aggressive growth phase against already established competitors do not want to signal their intentions or release sensitive information as it can be a critical mistake if their strategy is countered. I doubt any competitor takes a2MC lightly now, those days are gone, and it would be naïve to think it’s rivals will not do everything they can to protect their market share. This may frustrate investors who want more information or feel it will not matter however this is prudent discretion and good business practice by a2MC. Those investors with risk tolerance will be able to accept this in return for a higher success rate during this phase but others may struggle.

    Confidence & Expectations

    A lot will come down to confidence in the CEO and BOD for investors. JH started at a2MC a year ago and looking at the financial metrics investors should be happy with a strong report however they also need to be mindful that the company is maturing. Expectations should remain realistic IRT YoY comparisons as current levels this high cannot be maintained. I would not expect anything dramatic but a curve as the base builds. This is not a bad sign it is just an unrealistic expectation to think it can be maintained by any company this size as it grows. As discussed earlier there is a strong focus on forward thinking under this leadership group and investors looking for growth should be enthusiastic. After a year at the helm I am confident moving forward given strong results, the ability to deal with outside factors and in particular the direction JH is taking the company.

    Marketing

    Yes, it had an impact but I don’t think people fully understand the advantages of marketing. IRT ROI this is harder to calculate for a growth company compared to a more established one because there are compounding effects for product awareness and brand recognition that will increase future revenue. An accelerated growth strategy will also help lower unit cost and proportional distribution percentages as the company produces on a larger scale especially in the US market. This combined with direct sales from marketing in turn speeds up revenue which starts the next cycle sooner. A marketing cause and effect if you will. The other advantage is that it gives competitors less opportunity to react. Of course this will be proportional on the success of the marketing strategy but in basic terms a2MC will achieve higher revenue in a smaller timeframe. The forecast spend for 12% of sales FY20 allows a2MC to move forward quickly whilst still allowing a strong cash on hand balance for potential opportunities without going into debt.

    Moving further into the two largest consumer economies in the world against established companies was always realistically going to require marketing and the quicker a2MC can increase market share will see investors rewarded in the long-term. The good thing is that we are talking about a unique product that even Nestle could not replicate the success of. It also helps the marketing team as they promote a unique, high quality product with proven demand. Whilst each market is different a2MC has spent heavily to understand their particular requirements using both traditional and modern marketing and this bodes well for future success. The company also navigated the Chinese regulations easily which has allowed a multi-channel strategy that provides more protection to distribution moving forward.

    Interpretation

    In my view, similar to previous years, the market has misinterpreted the information and not understood the marketing implications for future revenue. If you understand the company then you know that a2MC is not based on traditional heavy infrastructure and, given the growth opportunities, this is exactly the direction a2MC should be taking. Whilst the SP may fluctuate short-term, the company is growing steadily and using cash on hand to increase market share whilst also providing risk mitigation is hardly a negative signal.

 
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