Commodities, IVC, A2M and DMP


Although you might need to squint to see it, the first signs of some commodity price retracement are underway.

Iron ore has dropped from $230/t to $180/t, but the agricultural commodities (or soft commodities) like corn, canola, wheat, soy are all dropping as well.

Lumber, not shown here, is off about 20% from the peak.

Our main takeaway has been not to chase commodities at these prices, or, by extension, the commodity producers.


A short look at Invocare, mainly because the stock price has fallen a long way, and we like to revisit the analysis. (Invocare is not in our portfolios, although we have looked at the stock in the past.) Invocare operates funeral homes, cemeteries and crematoria around Australia, New Zealand and Singapore.

Firstly, earnings. The inability to hold funerals was a major problem for IVC’s business model. However, the sales slowdown has been noticeable for some years prior. Draw your eye to 2015-2019, and you’ll note a pretty flat slope to earnings prior to 2020.

Further, a problem emerges when we look at cashflow vs profits. The accounting P&L profits are there, but there was no translation into cash.

We swiftly find that a large, sustained capex program is the culprit. And culprit is the right word, because all of that capex doesn’t appear to have bolstered operating cashflows, or earnings.

Perhaps the capex was mostly maintenance capex, and not really growth capex, which would explain why we don’t see a lift.

However IVC management assure us that most of it was indeed “growth” capex, and flag at least another 3-4 years of this.

What you could say is that perhaps in some counterfactual world where the capex wasn’t spent (refurbishing crematoriums, store fronts, memorial parks and the like) earnings and cashflows would have been worse. Perhaps material market share losses would have been incurred but for the spend.

In which case the increased competitive environment isn’t good either, and, if that’s the explanation, isn’t set to get much better in a hurry.

It gets worse, however, in that the negative free cashflow meant leaning on the balance sheet, which, when COVID struck, meant a sizeable, dilutive capital raise.

So, whilst the stock looks cheap, we conclude at this stage it is cheap for a reason, and we would look to revisit the stock later.


We’ve been asked a few times for our thoughts on A2M, given how depressed the share price is. The A2 milk company sells milk and infant formula that does not contain the A1 protein. Most of its products are made under license by third party firms.

Firstly, it screens as high quality, with poor earnings and price momentum, and, is still relatively expensive when compared against peers.

The high quality composite score comes mainly from the strong balance sheet (net cash)…

…and the generally good track record (past 5 years growth in sales, earnings, dividends etc), up until the last year or so.

40% returns for physically ferried milk is hard to defend at the best of times, let alone when your primary distribution method, the daigou channel, is effectively closed along with our borders.

The subsequent impact of competitors stepping into the void, and taking market share, will be hard to claw back when borders reopen.

The next issue is the ongoing margin squeeze from liquidating inventory (the same issue as with Kogan, which we wrote about on Friday).

Perhaps even more concerning, A2M mgmt have suggested they plan to raise pricing, to ensure that a premium to peers is maintained, which isn’t how you usually get rid of inventory.

But arguably the key issue is the Chinese fertility squeeze. There were 12% fewer children born in China, this year, than last year.

Partly that’s another angle on COVID, but it is also part of the adverse demography that infant formula (and really all baby-themed manufacturing) makers will struggle with. And it’s not just China, the general trend of lower fertility has been at play in both the developed and developing world alike.

So we’ve got a pie that’s getting smaller (the demographic effect), with pieces of the pie outright removed from the table (due to COVID/daigou) and a strategy response that relies on demand curves sloping upwards, with respect to price, rather than downwards.

That long run issue, combined with the shorter run impacts described above, have decimated valuation measures.

However because the starting point of valuation was so high, A2M is still somewhat pricey when compared to peers (everyone from BGA on down to GNC).

The expectations embedded in the share price, were A2M to maintain a PE of ~20x, still require a return to the previous peak in earnings. That’s possibly not quite as easy as it sounds, given the above issues outlined.

In our view, to avoid catching a falling knife, it’ll be easier and (somewhat) safer to buy some after we see some material insider support. When the directors get out the cheque book, we can feel more comfortable in doing the same.


“Why do we exist?” is an impressive existential question from the recent Domino’s Pizza slide deck. It turns out the answer is, perhaps unsurprisingly, about pizza.

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