How 4 brokers reacted to A2 Milk's FY21 profit update
We examine A2 Milk’s FY21 profit update as well as look at how four top brokers responded to this market release.
A2 Milk share price plunges following FY21 profit update
Infant formula and fresh milk company a2 Milk (A2M) saw its share price crash 11.4% on Monday – closing out the session at $15.2 per share – after revealing that its corporate daigou/ reseller channels had faced significant disruptions across September.
Looking at the key takeaways from the company’s Updated FY21 Outlook market release, it was reported that:
- Australian & New Zealand (ANZ) revenue is expected to be 'materially below plan' across the first half of fiscal 2021 as a result of these daigou disruptions – driven by Covid-19 restrictions.
- This is expected to be a short-term and temporary issue, assuming Covid-19 related issues subside. Other sales channels have not seen comparable impacts, it was noted.
- Market share and brand awareness continues to be strong across the Chinese IMF market.
In step with those broad points, A2's management said they now expected group revenue in FY21 to come in at between NZ$1.80 billion to NZ$1.90 billion. In FY20 the company reported total revenues of NZ$1.73 billion. On the bottom-line, earnings (EBITDA) margins – which have been a key focus for the market in recent times – are expected to remain elevated, with the company noting they expect full-year FY21 EBITDA margins to come in at around 31%.
Looking forward, as the company continues to grow its market share and brand awareness in China and assuming that the daigou issues recede, it was noted that A2’s management team has ‘confidence of a significant improvement in overall Group performance in the second half of the year.’
Despite this confidence, the stock fell again on Tuesday as the market continues to digest this news. At the time of writing A2M traded at $14.67 per share.
With management tentatively optimistic, the market broadly uncertain, how did analysts respond? Below we take a look…
The Swiss bank reiterated their bullish view on the IMF stock in response to the FY21 profit update – noting that there are 'good grounds' for daigou trade to resume once Covid-19 related restrictions are lifted.
By A2M’s own guidance – UBS analysts flagged that H1 revenues are poised to decline 4-10% on a year-over-year basis, with this having an obvious flow on effect to full-year revenues – which at now-guided levels and even at the top-end of the range, are set to come in below the market consensus.
UBS has a price target of NZ$22.70 and a Buy rating on A2M.
Analysts at Bell Potter argued that it appears difficult for the company to achieve its FY21 guidance as it is ‘reliant on A2M achieving a material acceleration in 2H21e revenue growth against elevated prior year comparisons in 2H20.’
In response to these ‘demanding’ expectations, the broker has downgraded the stock from Neutral to Sell. Looking ahead, it was further noted that:
‘The combination of continued weak trends observable in trade data, a material 2H21e uplift required on difficult pcp comparison and the arrival of a new CEO, suggest continued earnings risk.’
Bell Potter has a price target of A$13.75 on A2M.
The broker has continued to view the stock cautiously, reiterating its Underweight rating on A2M.
Following a call with management, though Morgan Stanley analysts noted that China label revenue growth looks to be well ahead of expectations, by the investment bank's own estimates, it was noted that '1H21 revenue guidance implies the daigou channel is down ~75%.’
Looking forward, it was further noted that A2's 'Capital management strategy is all about growth, do not expect a share buyback.’
Morgan Stanley has a price target of NZ$13.50 on A2M.
Macquarie responded critically to A2M’s profit update, lowering their price target while retaining their Outperform rating and arguing that:
‘Brand performance commentary which supports 2H outlook implies positive consumer demand, but acknowledge elevated uncertainty.’
In saying that, the investment bank’s analysts appear wary about the duration and timing around a potential daigou channel recovery, pointing out:
‘Retail daigou trade may take some time to reopen, split between demand and fulfillment issues for ~$200m revenue outlook swing, proof of ongoing reliance on some demand push factors which can be unpredictable.’
Macquarie has a price target of A$17.95 on A2M.
What are your thoughts on A2M?
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