Insights

The A2 Milk Company (ASX:A2M) recently conducted its Annual General Meeting (AGM), maintaining its guidance amidst a backdrop of uncertainty. While the need for a significant 2H21 improvement is acknowledged, positive signs of recovery in corporate daigou demand and improvements in daigou channel inventory offer a glimmer of hope.

Revised Forecast and Investment Outlook

Forecast Adjustments

In response to prevailing uncertainties, our forecasts have been recalibrated. Despite A2M's guidance, we've adjusted our FY21 EBITDA forecast approximately 4% below the lower end of its guidance range, reflecting a cautious stance.

Investment Recommendation

Despite the prevailing uncertainty, we maintain an Add rating for A2M. While near-term earnings uncertainty may exert pressure on the company's share price, we remain optimistic about its medium to long-term prospects.

Maintained Guidance with Qualifications

Overview of 1H21 and FY21 Guidance

A2M has upheld its 1H21 and FY21 guidance as previously stated. 1H21 revenue is anticipated to be NZ$725-775 million, showing a decline of 4-10% compared to 1H20. FY21 revenue guidance stands at NZ$1.8-1.9 billion, with an EBITDA margin of approximately 31%, translating to EBITDA of NZ$558-589 million.

Dependency on 2H21 Improvement

Acknowledging the uncertain forecast, A2M stresses the necessity of substantial improvement in 2H21 (16-22% revenue growth compared to 2H20). This period's performance hinges on critical factors such as the daigou channel's improvement and sustained growth in China labeled products through the MBS channel.

Regional Updates

ANZ Region

A2M underscores the challenging trading conditions in 1H21, particularly due to the contraction in the daigou/reseller channel, exacerbated by Victoria's Stage 4 restrictions. However, recent weeks have shown initial signs of recovery in the corporate daigou, following the launch of incentive programs and the relaxation of lockdown measures in Victoria.

Asia Region

Sales growth in the MBS segment remains robust, driven by an expanded distribution footprint and increased sales velocities. The company's performance during the 11/11 sales event met expectations, with notable increases in English label IF sales volume.

North America Region

A reduction in FY21 EBITDA loss compared to FY20 is anticipated, aligning with previous forecasts.

Forecast Adjustments

Considering the uncertain 2H21 recovery, our revised forecasts stand below the guidance, projecting revenue of NZ$1,731 million and EBITDA of NZ$537 million for FY21.

Navigating Uncertainties Towards Growth

While uncertainties linger, A2M's comments on the improving daigou channel inventory offer a ray of hope. We view the current challenges as transitory, with A2M's robust balance sheet and quality growth trajectory underpinning our confidence in its long-term potential.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

It seems Australians have been thinking more and more about the benefits of self-managed super funds (SMSFs) as they express concerns about their existing super fund in relation to transparency, liquidity and flexibility.

Despite the control, involvement and flexibility an SMSF can provide, there are a few things people need to consider before deciding if an SMSF is right for them.

Ask yourself the following questions:

1. Is the fund strictly for benefits in retirement?
2. Do you have the time to manage your own fund?
3. Will the benefit be worth the cost?
4. How will switching to your own SMSF affect your current superannuation benefits?

Having your own super fund to manage may sound easy. However, as you are the trustee of your own fund you are ultimately responsible for every decision you make. You need to understand there are some things you simply cannot do within your SMSF.

The regulator, the Australian Tax Office, will apply heavy penalties against trustees who break the law.

Watch

How much is enough?

This has been a hotly debated issue since the inception of SMSFs. Different people have different ideas as to exactly how much is needed to set up an SMSF. ASIC has recommended at least $500,000 for an SMSF.

It can be argued that people with less than this could easily manage their own SMSF, particularly if they are planning to make large contributions over time and/or have experience with investing.

The issue, of course, is cost. To remain cost effective it is generally accepted that the greater amount of funds pooled within the SMSF, the lower the cost average. Over the long term, as the SMSF account balance grows, the cost of running the fund becomes even more efficient.

# Paul and Mary are using a Corporate Trustee structure, which means an additional $455 ASIC fee. Bill and Ellie are using an Individual Trustee structure, so the only cost is the SMSF Trust Deed. * The ongoing company fee is a reduced ASIC fee because Paul and Mary are using a shelf company as the corporate trustee, and not an existing company. A shelf company acts as the corporate trustee only and is not associated to any other entity activities. ^ Administration fees charged by Morgans Wealth+ SMSF Solutions service and includes annual audit fee. This is an indicative cost only as the actual fee will depend on the administration/accountant service used. ** Ongoing portfolio fee - estimated average Morgans' Wealth+ fee

Size does matter

In relation to costs, clearly size does matter. There is a significant difference in the ongoing costs for Bill and Ellie compared to Paul and Mary. Even where Paul and Mary incur additional costs due to the corporate trustee structure, their average costs are less than half Bill and Ellie's.

If you would like to discuss whether a self-managed super fund is for you, or you would like to know more about what is involved in running your own SMSF contact your local Morgans office, or speak to your Morgans adviser.

"Our model tells us that on this occasion President Trump should be victorious over Biden by a margin of 5.76% of the popular vote. The predictive margin is 1.26 standard errors away from random. President Trump therefore has an 89.6% chance of being re-elected."

​Listen to my podcast to find out where this data comes from. I also outline the stats prior to when Barack Obama was re-elected:

Listen to the podcast

Roughly 55% of the ASX300 have now reported results, with only a handful of the ASX50 yet to report. Woolworths, Stockland and Fortescue are notable large-caps reporting this week.

August has been a story of Cyclical and Consumer facing stocks in particular in terms of

1. surprising overly fearful expectations, and/or;
2. being well supported by the market even if they didn’t.

Whether this can continue when fiscal support scales down will be a key question as we exit August.

Ultimately FY20 results disrupted by lockdowns and COVID related one-off’s are less meaningful than usual, particularly given the broad lack of FY21 guidance seen so far. Ongoing company trading updates and the AGM season are going to be far more important than usual, providing us with more catalyst trading opportunities which have worked well for us so far.

Watch

I provide an overview of the results and current observations:

Results scorecard

We've seen the highest rate of smaller cap "Beats" for several years. More than half are Consumer facing (including Education and Gaming) with Retailers comprising a whopping one-third. General speaking, Cyclicals have surprised, while Defensives have underwhelmed.

Expectations vs ASX200

Retailers are the one bright spot regarding FY21 upgrades. Retailers to report have enjoyed +10% upgrades to FY21 earnings per share (EPS) expectations with ~8% share price gains on average.

Elsewhere we've seen the usual erosion to FY21 expectations with the largest negative contributors including Telstra, CBA, AGL and various US$ earners.

Market optimism

Result day reactions highlight market optimism. The strongest result day reactions are in line with recent history but we are yet to see the market punish disappointment anything like it usually does.

We know equity markets like to pre-empt the recovery phase of the economic cycle which is why AGM season, and not less useful FY20 actuals, will be so important to validate this positioning (or not), especially relative to stretched valuations.

Checking in on trading behaviour

In our Reporting Season Preview, we spoke about tactics for trading around discrete catalysts given the mood of the market.

Of the +60 Catalysts flagged through July and August, the "Flagged Beats" have outperformed the "Flagged Misses" by ~12% since the published reports.

Notable winners include Collins Foods, AP Eagers, ALS Limited, Data 3, Adairs, Virtus & Monash, Isentia, Superloop and Dominos.

What's interesting is that much of that performance has occurred in the lead-up to the catalyst, rather than on the announcement.

Given the lack of FY21 guidance so far, trading updates and the upcoming AGM season look like providing a host of further opportunities to trade tactically around the abnormal mood, valuations and momentum in this market.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

What is a regular savings plan?

A regular savings plan is an arrangement you can create with (generally) a fund manager to invest an initial lump sum followed by regular investment instalments; the most common instalment period being monthly.

Minimum monthly investments usually start at $100. You can nominate your own amount above this according to your cashflow and what you can afford to save.

The regular payments can be deducted from a nominated bank account. This monthly payment is then invested on your behalf by the fund manager in the same manner as the initial investment, which might be in shares or bonds for example, depending on the fund you have chosen.

When you invest in a managed fund, you own 'units' in the fund. The value of the units in the fund will rise and fall with the value of the underlying assets it owns.

How much do you need to start?

You can start a regular savings plan with a fund manager with as little as $1,000. This will enable you to start growing your wealth and start saving for a long-term goal, such as:

• a deposit for a home, or home renovations
• future holiday
• children's or grandchildren's education

Benefits of regular savings plans

Regular savings plans enable you to invest your surplus income at a flexible level while allowing you to access your funds if required. Other benefits include:

Easy investment plan – direct debit from your bank account each month. Ensures a "forced saving" regime for your surplus cash.

Reduced investment cost – via 'dollar cost averaging'. By implementing a regular savings plan you gain the benefit of purchasing investment units at different prices which helps reduce the risk of mistiming the market. Your regular investment purchases less units when prices are high and more units when prices are low. By averaging the unit price paid, your investment cost is reduced. This is 'dollar cost averaging' and means that you don’t have to worry about where share prices or interest rates are headed.

Compound interest "multiplier" – by re-investing your distributions rather than taking the cash, your investment capital benefits from the effect of compound growth; which means, the distribution from your investment also earns interest.

Tax benefits – when a regular savings plan is invested via a specific education savings bond, tax benefits can be enhanced further for education-related expenses.

Flexible access to your funds with the ability to vary or suspend contributions.

How much do you need to invest each month to reach your target?

Below is a an example of the savings targets you would reach over a set period of time, based on the amount you contribute per month (calculated using an average return of 6.5% per annum).

Choosing a managed fund

There are thousands of managed funds to choose from. It's important to understand the different types of funds, the risks and returns, so you can choose a fund that meets your needs.

Morgans advisers are qualified to help you choose an investment fund that’s right for you and put in place an appropriate savings plan to help you achieve your financial goals.

If you would like more information, please contact your nearest Morgans office for an obligation-free discussion.

We think that comparisons of the potential impacts of COVID-19 with those of the GFC are premature. Below we draw on the views of leading economists to explain the most likely scenarios for the global economy from here.

Uncertainties remain, but calm logic suggests the sky isn't about to fall, and that major economies are in far better shape now than they were in 2008 to combat coronavirus impacts.

The wave of global fiscal stimulus is now ramping up which should help to absorb market volatility.

COVID-19: Similarities and differences versus the GFC

The GFC was essentially a "balance sheet" recession. The bursting of an earlier housing bubble punched a hole in household balance sheets, forcing a collective shift towards saving/de-gearing rather than spending.

This exposed vulnerabilities in a highly-leverage banking system and as counter-party confidence collapsed, the financial system froze up. This all manifested itself in a collapse in demand.

COVID-19 affects both supply and demand within the economy. Restrictions on people movements (factories, travel etc) reduces the productive capacity of the economy.

Less patronage also represents a demand shock as consumer spending falls, not helped by a falling stock market. These effects can also be self-reinforcing as lower incomes can affect spending.

The GFC was a financial shock affecting the demand side of the economy while COVID-19 is an economic shock affecting both the demand and supply. The two situations are fundamentally different which has implications for what is likely to follow.

What's next from here

The GFC led to a deep recession followed by a slow recovery as households and financial institutions repaired their balance sheets. The coronavirus is likely to trigger material falls in output in affected economies over the next quarter but, provided that the virus fades, activity should rebound as supply constraints are lifted.

The outlook is unusually uncertain but a sensible base case scenario at this stage is most likely to be a short, sharp shock. Policymakers will play a critical role in cushioning the downturn and stimulating a recovery.

Both fiscal and monetary actions stimulate demand and had a clear role to play in 2008 but its role today is less obvious.

Targeted, temporary and large fiscal support (e.g. loans, subsidies) can help to mitigate the shock form the virus, and monetary support can help to counter financial effects.

Cheap finance to banks lending to the most affected sectors and regulatory forbearance may also help to mitigate any strains in the banking sector. However the speed of recovery will depend on how the virus spreads, when containment measures are lifted and life returns to normal.

The financial system is in better shape to cope with this shock

The worst-case scenario today looks different versus 2008. History shows the most severe depressions tend to be caused by asset price collapses. In 2008, these effects were magnified by high leverage in the banking system and vulnerabilities in the global financial system (dependence on wholesale finance, short-term credit).

Debt levels remain high today but are concentrated in less risky areas (government vs households). Meanwhile, banks are far better capitalised. Pockets of risk exist – particularly in the corporate sector – and some of these vulnerabilities in the energy sector may be exposed by the sharp drop in oil prices.

Logic suggests these aren’t large enough (yet) to trigger a global crisis. Overall the most likely worst-case scenario today is a sharp but probably short downturn, rather than an outright depression.

As the virus spreads, there’s a chance that this scenario becomes the most likely scenario, but the prognosis for the virus beyond the next 6-12 months remains uncertain.

The sky isn’t falling : Michael Knox’s view

Chief Economist Michael Knox acknowledges the unique healthcare challenges posed by COVID-19 and the unknowns in how the pandemic will be resolved.

In The China Panic, March 3, he explains how the US economy is far more important for financial markets than the Chinese, and that it's strong outlook offers support to world capital markets and investors.

Ultimately Michael thinks that fiscal responses by both the US and Australian governments – ramping up now and over the course of 2020 – will act in time to buffer the Australian economy from recession.

Globally, he thinks there is ample liquidity in the financial system to absorb financial market volatility.

Facts will help suppress speculation: What you should do now

This story is a rapidly evolving one and unfortunately we've seen financial markets yet again move quickly to discount (and potentially oversell) uncertainty. Markets hate uncertainty, which can see equities re-price at abnormal discounts just as readily as complacency can (and was) pricing them at abnormal premiums.

We think market’s will calm as more information on the humanitarian and fiscal responses from key policymakers ramps up, which is happening now.

We advocate investors keep abreast of the calm facts through volatility and keep an open mind to deploying spare capital to capitalise on equity opportunities priced at far more realistic levels then they were heading into this.

More to follow.

Acknowledgements: Neil Shearing, Capital Economics, Michael Knox, Morgans

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.