Jarrod Goodall (FSP 198885)

Yovich & Co. Market Update

June 19th 2017 NZX 50G All Ords Shanghai FTSE Dow NASDAQ NZDAUD NZDUSD OCR

Previous Month 7441.57 5792.06 3110.06 7547.63 21080.28 6210.19 0.9489 0.7064 1.75% Week Close 7552.75 5808.04 3123.17 7463.54 21384.28 6151.76 0.9517 0.7249 1.75% Change 1.49% 0.28% 0.42% -1.11% 1.44% -0.94% 0.30% 2.63% 0.00%

Market Themes  Over the past four weeks the Market has reached fresh highs, as investors took confidence from a budget that was prudent but politically savvy by being supportive to low income earners in an election year.  a2 Milk (ATM.nz) was the best performing stock on the NZ Market over the past month, closely followed by (AIR.nz) , Fisher & Paykel Healthcare (FPH.nz), (EBD.nz) and (XRO.nz).  The failure of Theresa May to secure a majority on the UK election has provided further uncertainty to UK and European markets.  In The United States, the recent rally in Tech stocks reversed and the boarder Dow Jones index significantly outperformed the NASDAQ index.  The stability of the budget and the NZ Economy has seen the Kiwi dollar strengthen against both the Aussie and US dollars.

Investment News The a2 Milk Company (ATM.nz) In the current market where quality stocks have extended valuations, it becomes very difficult to find value. Genuine growth companies like ATM are providing real increases in earnings and valuations that continue to fundamentally move upwards. Here is a summary of their business from IRESS:

The a2 Milk Company Limited was founded in February 2000 on a simple, yet profound, discovery that different cows produce different milk proteins that behave differently in people’s bodies. Milk that is naturally rich in the A2 beta- protein (and free from all A1 beta-casein protein) has been found by many to be easier to digest. The a2 Milk Company single-mindedly pioneers scientific understanding, operational know-how and commercialisation of premium a2 Milk products around the world. Today, we have a range of products available in , New Zealand, UK and China, with further expansion planned.

ATM have created a new market and their recent result has surprised everyone, including themselves, at how strong their revenues are increasing. Here are a few comments from the latest research from First NZ Capital:

On the back of a revised production schedule with the company’s infant formula contract manufacturer and ongoing strong demand for its product, ATM has raised its previous NZ$525mn revenue guidance to NZ$545mn compared with our NZ$534mn pre-trading update forecast for FY17F. The increased production and delivery of this IF stock by ATM to its distributors is a signal of the ongoing strong and previously unsatisfied demand in the market for its products. It is also an indication that the economic incentives on ATM’s IF remain attractive to its channel partners in the market. Coupled with changes in the phasing of the company’s marketing spend in China, we have upgraded our EBITDA forecast by 8% in FY17F. The risk to our earnings forecasts in FY18F and FY19F remains to the upside driven by a combination of potential volume growth as well as higher gross margin. We maintain our OUTPERFORM rating with a revised NZ$4.10 Target Price.

ATM’s A1/A2-type milk hypothesis and digestive benefit claims, coupled with its suite of patents and trademarks have provided the company with a marketing platform for premium-priced differentiated products. Our view on ATM is premised on successful rollout of the company's A2-type-based dairy products (including IF) in Australia, the UK, the US and China markets. Key to this is the successful management of channels-to-market and of regulatory changes over time.

Financials & Forecasts 2016A 2017F 2018F 2019F Adjusted Earnings NZ$m 30 84 111 154 EPS Adjusted NZc. 4.4 11.7 15.5 21.4 EPS Growth % - 164.4 32.2 37.9 P/E x 86.2 32.6 24.7 17.9 EV/EBITDA x 121.1 36.2 28.5 20.5 EV/EBITDA (x) 49.6 19.8 15.1 11

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