BFC3540 Stock Debates – Week 1 – A2M & TWE

A2 Milk Company (ASX: A2M) 

The A2 Milk Company Limited (ASX code 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 has been the cause of many news-worthy incidents over the past year – we’ve all seen the report where the Box Hill Woolies gets stomped on by Chinese shoppers trying to get their hands on the holy grail of milk powder.

And you know what they say – where the Chinese go is where the money goes. You’d be robbing yourself if you didn’t check out those massive G A I N S from the start of this year:

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But what’s up with the big dip from August onwards? Well the company didn’t meet market expectations. The market consensus for net profit expectations was around NZ$296.2 million, around NZ$9 million higher than reported figures. The company also pulled out of the UK, reported a huge loss in the US and spent a lot of money on marketing. So despite it having a pleasing result, there were some negatives.

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Reasons to LONG

  • Company transitioning to pulling out of the UK business, further strengthening market share and revenue for US, ANZ and China
  • In a bit of a slump – as evidenced by the annual report, marketing costs are high, and this may bite in the short-term, however recovery is expected – this is sowing seeds for sustainable long term growth
  • In the long-term, A2 will still produce good results– since the market is quite short-sighted, it sees increasing expenses as a negative

Reasons to SHORT

  • UK business being pulled out signifies a stormy road ahead in the short-term – why isn’t the business successful in the UK? Question mark?
  • US marketing spending is too high – $44m EBITDA loss is unacceptable
  • Baby formula competition will intensify in China

Treasury Wines 

Treasury Wine Estates (TWE) is one of the world’s largest wine companies. 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.

Reasons to long

  • FY19 results – TWE’s EPS is up 17% to 60.4 cents per share, return on capital employed has appreciated to a whopping 14.9% and NPAT has increased by 16%.
  • High Chinese demand – TWE is a strong growth company, but is heavily dependent on Chinese consumers. Fortunately, China is forecasted to have a 5-year CAGR (2018 – 2022) in wine consumption of 9.8%, incredibly higher than any other key growth area and market.
  • Investment in growth – Investment in French production and vineyard assets, and the expansion of Luxury winemaking infrastructure in South Australia announced to support continuation of the premiumisation strategy
  • New revenue stream opportunities – TWE has as ongoing focus on generating new revenue streams and selectively pursuing potential opportunities for category adjacencies for some brands (e.g. Penfolds spirit wines, Squealing Pin Gin)

Reasons to short

Historically very volatile and returns are close to non-existent

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  • TWE Executives on the loose – On July 3rd, Peter Dixon, an executive at TWE was seen on a social media post raising his middle finger posted, excessively drinking. Allegations of intellectual property theft have also arised to clawback a $1.3 million bonus paid to the former head of Asia at TWE. This is sure to have tainted TWE’s reputation and any action from TWE employees and staff in the coming months will be under critical examination from the public.
  • US-China trade war – TWE remains vulnerable to a renewal of international trade tensions, especially as they affect China
  • Technical indicators – The 200 day moving average is a technical indicator used to analyze and identify long term trends. If price is consistently trading above the 200 day moving average, this can be viewed as an upward trending market. Markets consistently trading below the 200 day moving average are seen to be in a downtrend. TWE has crossed below its 200-day moving average during trading on Friday (14/9/19) after an insider sold a significant number of shares in the company. The stock has a 200-day moving average of $15.94 and traded as low as $18.09.

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