Valuation Report: A2 Milk Company - FIN2SEV Investment Security

This report provides a comprehensive analysis of The a2 Milk Company Ltd (A2M), focusing on its investment potential. The report begins with an investment summary, business description, and an in-depth industry analysis using Porter's Five Forces and PESTLE analysis to assess external factors. It then delves into the company's financial performance, including a detailed financial analysis with key economic drivers such as price and sales, alongside a comparison with competitors like Nestle SA. The financial analysis includes horizontal and vertical analysis of the company's earnings and return. The report evaluates the company's liquidity, solvency, profitability, and efficiency ratios. Finally, the report concludes with an assessment of investment risks and provides a recommendation. The report leverages financial data and market insights to provide a thorough evaluation of A2M's investment prospects.

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INVESTMENT SECURITY

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Contents
Industry Analysis..........................................................................................................................................3
Porter Five Force Analysis........................................................................................................................3
Threat of Substitute.............................................................................................................................3
Threat of New Entrant.........................................................................................................................3
Competition among existing players.......................................................................................................3
Power of Suppliers...............................................................................................................................3
Power of Customers................................................................................................................................3
External Factors - PESTLE Analysis...............................................................................................................3
Political Force..........................................................................................................................................3
Economic Force...................................................................................................................................4
Social Force..........................................................................................................................................4
Technological Force.............................................................................................................................4
Legal Forces.........................................................................................................................................4
Environmental Forces..........................................................................................................................4
Key Economic drivers..................................................................................................................................5
Price.........................................................................................................................................................5
Sales........................................................................................................................................................5
Financial Analysis.........................................................................................................................................5
References...................................................................................................................................................9

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Industry Analysis
Porter Five Force Analysis
Threat of Substitute
In the industry in which A2 Milk operates its activities is comprised of a very limited number of
substitutes. The available substitute is also making low-profit earnings industries. This reflects
that there is no limit in maximum profit that can be earned by the companies in the industry. This
results in a low threat of substitute for the company.
Threat of New Entrant
The threat of new entrant in the Australian milk industry is very weak because it is very tough
for the businesses operating in the industry to attain economies of scale (Fern Fort University,
2019). This results in supporting in attaining competitive advantage to those businesses which
are producing products in large quantity. On the other side, it makes production costlier for the
new entrants.
Competition among existing players
The available number of competitors to A2 Milk is very limited which results in weaker
competitive force. There is also a very limited number of players of large size.
Power of Suppliers
The number of suppliers in the industry of A2 Milk is large in comparison to buyers. This
reflects that the suppliers have low control over the prices of the products and this result in
making the suppliers bargaining power low.
Power of Customers
The bargaining power of the customers in the industry is low due to the availability of a limited
number of firms producing products.
External Factors - PESTLE Analysis
Political Force
The political situation of Australia is stable, which reflects that the government of the country is
very effective in framing the policies and regulations for the businesses operating in the country

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(Scott, 2018). The government has implemented different policies for the protection of small
milk producers and restricting large operators to establish a monopoly in the market.
Economic Force
The country has a stable economic condition; in fact, it has attained a 13th position in the list of
countries with a productive and stable economy. However, the global economic downturn has
impacted a large number of business operators and the GDP of the country.
Social Force
The social force of the country possesses a higher power of influencing the business
organizations in the market. It is known that with the changing trend the demand and preference
of the customers also change in terms of taste, price, view, etc. In addition to this, today people
are becoming health conscious due which they prefer fat free milk and for their kids, they like to
go for the best brand. It is very tough for A2 Milk to sustain its position in the market
(Euromonitor, 2018).
Technological Force
Technology is disrupting a number of businesses quickly. The fast development in the industry is
one of the major influences on A2 Milk Company. In order to successfully operate the business
in the market, it is suggested that the company must incorporate advanced technology into its
distribution channel. In addition to this, the environmental factors like climate change weather
change damage the product of the company, hence, in order to protect and store the products, the
company has suitable warehouses.
Legal Forces
In different nations, the legal framework is not so strong for the protection of intellectual
property rights. However, Australia has a stable and effective legal structure which is capable
enough to protect the rights of different business and restrict illegal operations. A2 Milk is
effective enough to follow all the legal policies of the country such as anti-trust law,
discrimination law, copyright, etc.
Environmental Forces
Different market possesses different rules and regulations or environmental standards which can
have a major influence on organizational profitability. Even in a single country different states

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have diverse liability laws and environmental laws. A2 Milk is successfully operating in the
Australian market by following all the food and beverages standards.
Key Economic drivers
Price
Price is one of the key economic drivers of the industry in which A2 Milk operates its business.
If the price of the product in the market will decrease the demand for the product will increase,
and also support the company in attracting customers. The reasons for the decreasing the price is
inflation in the market (Laird Norton, 2018). On the other hand, if the price of the product will
increase, it will lead to decreasing demand and customers will switch to other low-cost operator
offering products at low cost.
Sales
Sales are another key economic driver of the industry of Australia as it is one of the factors that
demonstrates the performance and influence of the business in the market as well as over
customers (Complete Controller, 2019). If there is an increase in the sales of the business reflects
that the company is effectively able to sell its products with the help of advertisement. In
addition to this, the increases sales highlight that the demand for the product is high and the
product offered by the company is of good quality. Whereas, decreasing sales of the company
reflects that the company is not able to meet the expectations or demand of the customer in the
market.
Competitive Analysis
Comparison Basis A2 Milk Nestle SA
Overview A2 Milk Company is one of
the known company offering
its products in the New
Zealand, United States,
Australia, UK, and China
Nestle SA is one of the
largest food and beverage
company of Switzerland.

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Strength One of the major strength of
A2 Milk is able to spread
wide operations across
different places by
maintaining strong
relationship with its
suppliers.
Company has strong
presence in the worldwide
market (Jurevicius, 2017).
Besides this, it is also has
strong brand recognition in
comparison to A2 Milk.
Weakness In comparison to Nestle, A2
Milk does not get involved in
the research and
development, due to which it
lacks in innovation.
Nestle has been involved in
number of controversies
related to food
contamination.
Marketing Purpose The marketing purpose of the
company is to increase
awareness among people
regarding health benefits of
the product.
The marketing purpose of the
company is to maintain its
leading position in the global
market.
Financial Analysis
From the above analysis it can be stated that the company has few key attractive areas as well as
non-attractive areas. The liquidity position of the company is outstanding as the current ratio has
been more than the ideal ratio and so is the quick ratio at 3.03 and 2.60 respectively. This
indicates the company is able to pay back the liabilities on time and the cash cycle is working
perfectly.

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The solvency ratios indicates that the company is switching more towards the debt rather than
equity as it can be observed from the ratio being 1.18 in comparison to 0.59 in the year 2018.
The ability of the company to handle the finance cost is also fluctuating in nature, which can be
improved as well. The debt to total assets ratio is also the falling which indicates that the
company is not financing much of its assets form the debt portion.
The next scenario is the profitability which includes the performance of the net profit margin and
the return on equity. The net profit margin have increased from 9% to 33% and the return on
equity have increased from 23% to 55%. This suggests that the overall performance of the
company is outstanding and the company shall maintain the same.
The efficiency ratios determine the ability to collect the cash from the debtors and the ability to
realize the inventories. The debtors are realized in 74 days and the inventory in 51days which is a
problematic situation and the same needs to be recovered. Lastly the market performance is also
sound and it can improve in order to sustain for the longer time period.
Earnings Analysis
Horizontal
Analysis
Vertical
Analysis
2016 2017 2018 2017 2018 2017 2018
Sales
35250
2
54924
7
92235
4 0.56 0.68 100% 100%
Net profit 30436 90646
19568
4 1.98 1.16 9% 17%
Total Return
Analysis
Horizontal
Analysis
2016 2017 2018 2017 2018
Return on Equity 23% 42% 55% 0.84 0.30
Return on total assets 168% 160% 128% -0.05 -0.20

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References
Complete Controller (2019) How to Identify Key Drivers of a Business [online]. Available from
https://www.completecontroller.com/understand-the-economic-drivers-of-your-business/
[accessed 16 May 2019]
Euromonitor (2018) Health and Wellness in Australia [online]. Available from
https://www.euromonitor.com/health-and-wellness-in-australia/report [accessed 16 May 2019]
Fern Fort University (2019) Australian Dairy Farms Group Porter Five Forces Analysis
[online]. Available from http://fernfortuniversity.com/term-papers/porter5/asx/632-australian-
dairy-farms-group.php [accessed 16 May 2019]
Laird Norton (2018) 5 Key Economic Drivers for 2018 [online]. Available from
https://lairdnortonwm.com/2018/03/5-key-economic-drivers-2018/ [accessed 16 May 2019]
Scott, J. (2018) Australia’s Political Stability in Focus Again With Joyce Reports [online].
Available from https://www.bloomberg.com/news/articles/2018-10-17/australia-political-
stability-in-focus-again-amid-joyce-reports [accessed 16 May 2019]