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Is a2 Milk worth NZ$22 per share?

We examine why analysts from the UBS Evidence Lab see further upside from the still fast growing a2 Milk.

Analysts from the data-centric UBS Evidence Lab, believe that a2 Milk (A2M) has room to run higher, today reiterating their Buy rating and 12-month price target of NZ$22.00 per share on the fast growing company.

For reference, the UBS Evidence Lab is a separate team of sell-side experts from the investment bank's Research team.

A2 Milk share price: the current competitive landscape

Centrally UBS was impressed by the online share gains A2 experienced during the early parts of the year, though noted that they have tapered off in recent months, as pantry stuffing activity subsides, and concerns around Covid-19 moderate.

‘Following a particularly strong Jan/Feb/Mar, where A2M share of online best sellers rose ~830bp y/y, gains have moderated in April/May (to +350bp y/y) as the impact of pantry stocking has normalised.’

Looking at other alternative data sources, the investment bank went on to point out that ‘WeChat engagement, which has historically been a leading indicator for online best-seller share suggests ATM's share is likely to remain broadly steady into June.’

In step with the positive trends observed by the UBS evidence lab, a2 Milk itself in April upgraded its full-year margin guidance.

Indeed, although A2 continued to stress that the Covid-19 situation had brought uncertainty to top and bottom-line growth metrics, the company nonetheless said it expected full-year revenue to come in at between NZ$1,700 million to NZ$1,750 million.

In FY19 A2M’s revenue stood at NZ$1,304 million – with the above guidance therefore implying a move of between ~30% to ~34%.

Maybe more importantly however was the company flagging that it expected its FY20 EBITDA margin to come in at between 31% and 32%. A2 attributed this margin increase to higher revenues, lower than expected costs as a result of Covid-19 and favourable currency fluctuations.

A key catalyst in view

Looking at what could drive A2M's share price higher, UBS analysts theorised that one ‘further catalyst could be a new product launch, with our industry discussions suggesting new products may come in the near-medium term,’ with it being added that 'near-term earnings risk remains modestly skewed to the upside.'

At the time of writing the a2 Milk (A2M) share price has performed strongly, rising ~22% to last trade at $17.350 per share.

How to trade a2 Milk – long and short

What do you think: are you bullish or bearish on a2 Milk’s prospects? Trade accordingly. For example, you can trade A2M shares and other growth stocks – both LONG and SHORT – through IG’s world-class trading platform now.

To buy (long) or sell (short) a2 Milk with CFDs, follow these simple steps:

  1. Create an IG Trading Account or log in to your existing account
  2. Enter ‘a2 Milk’ in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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