What happens when a market darling falls from grace, and loses the faith of investors? Here is a look at three classic scenarios.
- A2 Milk Company (FCL, $4.68)
Market capitalisation: $3.4 billion
12-months total return: –29.9%
Three-year total return: –22.8% a year
Estimated FY25 yield: no dividend expected
Estimated FY25 price/earnings ratio: 19.8 times earnings
Analysts’ consensus price target: $5.14 (Stock Doctor/Refinitiv, ten analysts)
I am old enough to remember when baby formula and fresh milk company A2 Milk was a market darling, when there seemed no end to the enthusiasm of Chinese daigou (professional or semi-professional shoppers outside China, who buy goods for people living in China) shoppers for the company’s infant milk formula (IMF) products.
A2 Milk has built a strong brand around the health benefits of its milk products that only contain the A2 beta casein protein type, achieving a premium selling price, and the Chinese market was very keen for it. The A2 protein is reported in some studies to be safer, and have greater digestive benefits, and A2M has successfully marketed its products based on this premise.
That is still the case: A2M produces, markets, and sells premium-branded dairy nutritional products, including milk, infant formula (its most profitable product), skim and full cream milk powders and cream, with its competitive advantage still the fact that its products contain only the A2 beta casein protein type. A2M currently sells its products across ANZ, China, SE Asia, and the USA (fresh milk only). A2M owns 19.8% of its New Zealand-based contract manufacturer Synlait, and also bought recently purchased 75% of dairy nutrition business, Mataura Valley Milk (MVM).
A2 Milk was one of the great listings of the 2000s. It arrived on the Australian Securities Exchange (ASX) in March 2015 as a dual listing, having first listed on the New Zealand Stock Exchange in 2004. The company then sought a dual listing on the Australian share market in March 2015, with no capital raised. It arrived on the ASX at 56 cents apiece – and then soared to almost $20 by July 2020.
But things started to sour in the 2020-21 financial year, with four earnings downgrades, and a final result that came in at the lower end of guidance, well below analysts’ consensus forecasts. The company was hammered by the COVID-19 disruption – here and in China – and news of China’s declining birth rate. Full-year sales in 2021 fell 30%, underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) plunged 76% and net profit slid 77%.
Between FY21 and FY23, the English-label IMF market slumped 25% in value, while the Chinese-label IMF market fell 16% in value.
But a new management team took over in FY21, and they have done a good job. Net profit rose by 27% in FY23, on the back of a 10% lift in revenue, to $US1.59 billion; and for the first time, revenue from the “China and other Asia” market surpassed the $NZ1 billion milestone, representing 63% of total sales revenue. The company has set targets that include doubling its China Label market share and recovering half of its English Label sales since the downturn in FY21. A2 Milk only has a 5%—6% share of the $30 billion infant formula category in China, and it remains the company’s biggest growth opportunity.
In 2022, China’s birth rate fell 10% on the back of China’s zero-COVID strategy. The birth rate has now fallen for the last six years in row, and the Chinese infant formula market has structurally changed, with increased competition from domestic Chinese competitors and big changes for the daigou market (they now need to be registered and pay tax). Along with general macro-economic conditions and geopolitical concerns, and amid disputes between A2 Milk and its supplier Synlait, the shares fell as low as $3.74 in November 2023.
But A2M shares look to be on an upward trend again, buttressed by the fact that it still has a very strong brand in China.
Is the worst over for A2M? Analysts definitely think so.
- Mesoblast (MSB, 27 cents)
Market capitalisation: $232 million
12-months total return: –70.3%
Three-year total return: –50.1% a year
Estimated FY25 yield: no dividend expected
Estimated FY25 price/earnings ratio: no profit expected
Analysts’ consensus price target: 57.6 cents (Stock Doctor/Refinitiv, four analysts)
Since listing in December 2004, Mesoblast has come to signify all that makes biotech investing a too-risky proposition for a lot of investors.
When it listed, Mesoblast was focused on commercialise its unique adult stem cell technology, with specific application in the regeneration of bone and cartilage. The applications may have changed a bit, but the focus is still on its stem cell platform. There have been quite a few setbacks with the global biotechnology “gatekeeper,” the US Food & Drug Administration (FDA).
For example, Mesoblast has faced several setbacks from the FDA over the last few years for its cell therapy RYONCIL, which is the improved version of the company’s lead product candidate remestemcel-L, which is aimed at treating children who have the devastating and life- threatening complication of a bone marrow transplant called acute graft-versus-host disease (aGVHD).
There is no approved therapy for children with steroid-refractory-aGVHD (SR-aGVHD) under age 12, a severe immune response after bone marrow transplants – it is a condition with very high mortality. Mesoblast’s trial results indicated that RYONCIL could substantially improve survival in these children. Nevertheless, there have been delays in gaining approval.
In August, Mesoblast had its share price slashed in half after it received a “complete response letter” (CLR) from the FDA, after the US agency reviewed Mesoblast’s biologics license application (BLA) for remestemcel-L. A CRL is a notice issued by the FDA indicating that an application will not be approved in its present form. It is not a rejection of an application; Instead, it is notification from the FDA that gives companies the opportunity to correct or alter or add more information to an application, so that it may be approved in a subsequent review.
The FDA told Mesoblast that it must conduct an adult trial before the product is approved for children. But because it was the second CRL that Mesoblast had received for remestemcel-L after originally submitting a BLA in 2020, the share market reaction was savage.
Mesoblast told the market on October 31 last year that it had a “very productive meeting” with the FDA in September 2023, which has allowed it to establish the path forward for potential paediatric and adult approvals of RYONCIL in SR-aGVHD. At the meeting, Mesoblast presented the FDA with clinical data indicating that treatment with the improved RYONCIL product version of remestemcel-L, manufactured using the current process inspected by FDA, had resulted in consistently high survival rates in children with SR-aGVHD. Moreover, Mesoblast intends to commence a Phase 3 trial of RYONCIL in adults and adolescents, a market more than five times larger than the paediatric market.
The point is that RYONCIL is far from finished as a drug candidate; despite the August mauling showing that the local market had lost patience.
And there has been further good news for Mesoblast. Earlier this month, the shares jumped by as much as 25% after the FDA granted its allogeneic cell therapy Revascor (rexlemestrocel-L) a rare paediatric disease (RPD) designation, recognising Revascor as a potential breakthrough treatment for heart disease in newborn babies. The RPD designation is given to drugs and biological products that offer major advances in treatment for rare diseases, which in the US is defined as a condition affecting fewer than 20,000 people. As well as winning approval for children with congenital heart disease, Mesoblast told the market that it would meet with the FDA in the current quarter, to discuss the approval path for Revascor in adults with heart failure.
There is no question that Mesoblast has been a huge source of frustration for investors, certainly since the share price peaked at close to $10.00 in 2011. The company has spent $1 billion but is yet to deliver a product through FDA approval, and to market. It raised a further $60.3 million, at 30 cents a share, in December, and those shares are still under water – meaning that there are probably new investors that have been introduced to the frustration.
But from here – if you do not already own the stock – analysts are backing MSB to perform for you.
- NOVONIX (NVX, 55.2 cents)
Market capitalisation: $270 million
12-months total return: –69.3%
Three-year total return: –46.5% a year
Estimated FY25 yield: no dividend expected
Estimated FY25 price/earnings ratio: no profit expected
Analysts’ consensus price target: n/a
Lithium-ion battery technology company NOVONIX was riding high in 2021, with the shares appreciating almost 650% to a peak of $10.68, as the market got itself into a fervour over battery metals for the great mooted electric vehicle (EV) and clean energy transition.
NOVONIX qualified for this enthusiasm because it is building the capacity to manufacture and supply battery-grade synthetic graphite from the North American battery supply chain, through its plant at Chattanooga in Tennessee. The NOVONIX Anode Materials (NAM) operation is the only US supplier of graphite anode. Established in 2017, the plant (known as Riverside) manufactures synthetic graphite anode materials used to make lithium-ion batteries which power electric vehicles, personal electronics, medical devices, and energy storage units.
Phase 1 of production at Riverside is for 3,000 tonnes a year, enough to secure 0.5% of the North American anode market share. The planned Phase 2 expansion of capacity would lift production to 40,000 tonnes a year, enough for 10% market share; the planned Phase 3 expansion projects production of 150,000 tonnes a year, taking market share to 16%. The company has won a US$150 million ($227 million) grant from the US Department of Energy for this expansion, which envisages a new “greenfields” facility being added: NOVONIX is assessing various sites for this decision.
The other main business is NOVONIX Battery Technology Solutions (BTS), based in Halifax, Canada. Spun out of Dr. Jeff Dahn’s lab at Dalhousie University, BTS provides what the company says is the most accurate battery-cell testing in the world, used by leading battery makers, researchers and equipment manufacturers, including Panasonic, BOSCH, Dyson, Alcatel, Lucent and 3M.
NOVONIX owns a 5% stake in KORE Power, a US-based developer of battery cell technology for clean energy industries. The two companies have worked together since 2019 to improve KORE’s battery technology. NOVONIX will be KORE Power’s exclusive supplier of graphite anode material in North America. The first 3,000 tonnes a year of production at Riverside- expected in late 2024 – is contracted to KORE Power.
NOVONIX is also working to commercialise its proprietary all-dry, zero-waste cathode synthesis technology, which it believes could enable a substantial reduction in the cost of producing high energy density (high nickel-based) cathode materials including cobalt-free materials, an industry game-changer. A cathode pilot line, producing 10 tonnes a year, was commissioned in July 2023, and its first product, a single-crystal cathode material, is performing in line with leading cathode materials from existing suppliers in full-cell testing.
The company has also agreed to form a joint venture in Saudi Arabia to produce high-performance synthetic graphite; the front-end engineering design (FEED) study is under way and the target to building the facility is in 2024.
In August 2021, NOVONIX announced a deal with US energy giant Phillips 66, in which Phillips 66 acquired a 16% stake in Novonix for US$150 million. It believes this investment will support its development of an entirely domestic supply chain for the growing US electric vehicle (EV) market and other energy storage systems. The company also has a deal with global battery manufacturer LG Energy Solutions, for joint research and development of artificial graphite anode material for lithium-ion batteries.
NOVONIX definitely has tailwinds behind it, with the United States having slapped a 25% tariff on artificial graphite imported from China, and the Inflation Reduction Act (IRA) of 2022 including an estimated $369 billion ($559 billion) in investments related to “climate change and energy security,” including tax and other incentives to promote US production of EVs, renewable energy technologies, and critical minerals.
There is so much promise, and so many big names backing the company; but the problem is that market sentiment toward the battery metals space is such a long way away from late 2021, when NVX changed hands for $10.68.
The technology is not yet proven, and as broker Morgans sums it up, “NVX has not yet secured a tier one customer for its anode materials and it is some time away from commercial operation.” NVX will also need to raise significant additional funds.
There is no analysts’ consensus price target where you can identify the brokers or number of contributing analysts (Morgans, for example, no longer gives a price target); but financial website Wallmine gives a one-year price target of $3.00. You can’t fault the ambitions of NOVONIX, and the big plans it has to crack a potentially massive market, but there was only US$1.78 million ($2.7 million) of revenue in the most recent quarterly result (September 2023), and negative cash flow of US$12.3 million ($18.6 million): the company had US$86.8 million ($131.5 million) of cash on hand at the quarter end. In buying NVX now, understand that you are taking a punt.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
