BFC3540 Investment Debates – Week 1 – MQG, TWE and A2M

Macquarie Group (ASX: MQG)

Macquarie Group Limited (MQG) is a global provider of banking, financial, advisory, investment and fund management services, headquartered in Sydney.

MQG is a god tier bank – hang on, they’re not actually much of a bank. To set things clear – there is no case to shorting MQG – if you do, you honestly shouldn’t be here.

On a more serious note, if you believe that the market is going down, then you could perhaps have a short position on MQG. Otherwise, this stock is a LONG.

  • MQG have an extremely diverse range of operations (below)
    4.PNGYou can look at a lot of their business areas and see why they are performing so well:

    • Asset management → equities/global economies are bullish
    • Corporate and asset finance → diversity away from just property loans
    • Commodities and global markets → commodity markets have woken up and all commodity prices are performing quite well, which reflects stronger performance in the materials sector which can feed their commodities and global market segment

    Furthermore

    • Santos (ASX STO) recently acquired Western Australian Quadrant Energy in circa $3bn deal. MQG owns 22% of Quadrant and will look to book around $250m profit. This gives MQG more confidence to hit next reporting seasons forecasts and exceed expectations
    • In the past two months MQG hasn’t fallen below $120, so we believe that buying it here presents optimum risk/reward

    Questions to ask

  • How do you think the royal commission affects MQG and their operations?
  • How does the weakening AUD/USD affect MQG and their earnings?
  • How does the housing market and Australia’s high household debt affect MQG?
  • How does the new Prime Minister affect MQG?

Treasury Wines (ASX TWE)

Treasury Wine Estates Limited (TWE) is a global wine company with an international portfolio of wine brands and viticultural assets. TWE’s wine portfolio includes wine brands: Penfolds, Beringer, Lindemans, Wolf Blass and Rosemount Estate and more. The Company owns over 13,000 hectares of vineyards, with more than 3,000 winemakers, viticulturists, sales, distribute and support staffs. TWE wine is sold in more than 100 countries around the world.

TWE has been a standout performer – it was merely $4-5 when you started Uni! TWE has remained in a volatile uptrend as it continues to punch out solid growth figures but also adversely affected by aspects such as a struggling USA division and Chinese regulatory concerns.

Reasons to LONG

There are a multitude of reasons why TWE will continue to hit new highs.

  • TWE’s ANZ segment achieved a 22.5% increase in EBIT, Europe segment EBIT grew by 20.7% and Asia had EBIT growing 36.7% – if TWE continue their growth trajectory, the share price will no doubt head north
  • China presents a huge opportunity for TWE – a small slice of market share provides unimaginable growth. If TWE can execute well in Asia/China, then they can no doubt be a $20+ stock

Reasons to SHORT

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TWE remains a relatively expensive stock vulnerable to its international operations. Because its expensive, anything short of brilliant will be punished. Particularly in our current market where the general index is struggling to make ground – TWE could be vulnerable to a sell down.

Questions to ask

  • China has the tendency to announce new regulations all the time. We saw Bellamy’s (ASX BAL) fall some 50% from changes to infant formula rulings and A2 also fell quite significantly. Is this a risk you’re willing to take on an already expensive company that is struggling in the US and providing average growth in others?
  • TWE has actually struggled with the logistics and execution of its strategy in both China and the US. Particularly in the US – they’ve seen declines in market share and excess inventory. This is a poor valuation of risk/reward. Why have you decided to long?
  • Evidence has shown that expensive stocks are vulnerable to market sell-downs. The ASX has been very volatile ever since it hit 10-year highs – why not buy the cheaper alternatives such as A2 or MQG.

A2 Milk (ASX A2M)

The A2 Milk Company Limited (A2M) is engaged in the commercialisation of intellectual property relating to a2 brand milk and related products in New Zealand, Australia, and the United Kingdom. A2M also sources, produces and supplies a2 brand milk and milk related products in Australia. The product comprises of Liquid Milk, Infant Formula and other dairy products which include Cream and Yoghurt.

A2 is a god-tier company – if you owned a mere $2,000 of A2 when you started Uni back in 2014/15 – you’d probably be able to pay off your hecs debt in cold hard cash.

In terms of macro – there isn’t too much to talk about. Global consumption of dairy has been on a stable rise due to an emerging middle class. A2 milk has a special branding of a2 proteins in the milk – which appeases to both our domestic and international markets. If you wanted to SHORT A2, it would be on the assumption that the general market is going down – otherwise, this is a LONG.

A2 Milk kills it on all metrics.

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  • The company grows like crazy and is expanding into new markets such as Singapore and South Korea, adding further strength to their portfolio
  • They’ve secured supply by signing partnerships with producers such as Synlait Milk and Fonterra, learning from the past when they had supply constraints
  • Their ANZ division has steady growth as more consumers become aware of their branding
  • Their baby formula division did a lot of the heaving lifting in terms of growth. A big thing for Chinese consumers is to buy A2 in Australia and resell in China. A2 is a dominant brand for this type of transaction as Chinese consumers make better margins selling A2 than any other baby formula brand.
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Questions to ask

  • What is the progress of A2’s CFDA approval?
  • A2 recently announced changes to China’s import legislation – how do you think the company will cope? We’ve seen massive sell downs before – what makes you confident that it won’t happen again?
  • What if A2 protein is just bs, what happens to the company then?
  • You buy this stock on the back of its growth in China, does A2 have any physical stores in China? Or are they purely export related?
  • Does A2 have an e-commerce presence? E-commerce in China is huge.

Disclosure: At the time of writing the author owned shares in A2M. The UNIT Monash President holds shares in SYD.

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