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What's the outlook as a2 Milk raises its FY20 margin guidance?

We examine the implications of A2M’s latest market release.

Margins, and whether a2 Milk can/ could maintain them, has long been a key concern amongst analysts and the market more broadly.

So much so in fact, that when A2’s former CEO, Jayne Hrdlicka, said that FY20 margins would likely come in lower as a result of a marketing blitz – planned at the time to hit approximately 12% of sales – investors responded sharply and with little hesitation to sell-down the stock.

From August to November 2019, A2M plunged about 30%, before bottoming out at $11.28 per share.

In a dramatic move, Hrdlicka stepped down as CEO in December, to be replaced by Geoffrey Babidge. The man who had originally transformed the company from fledging IMF player into a growth power-house. Mind you, by then the a2 Milk (A2M) share price had rallied close to 30% off its 52-week low, after the company flagged a more favourable margin outlook at its November AGM.

Without Hrdlicka at the helm the dictum was simple: growth would be a focus but there would be a greater emphasis on maintaining margins.

The coronavirus impact examined

In the wake of the global coronavirus (Covid-19) pandemic, the outlook for A2 has actually improved, as communities and individuals place an ever-greater focus on health and wellbeing.

A2 did indeed note as part of its H1 results that it had seen an increase in demand for its products in the early stages of the second half.

Such a view was quantified today, with a2 Milk upgrading its full-year margin guidance and noting that it expected FY20 revenue to come in at the range of NZD$1,700 million to NZD$1,750 million.

'Full year EBITDA margin is now anticipated to be above that advised in February and in the range of 31% to 32%. This assumed that planned marketing activity for FY20 of $200 million, weighted to 2H20, will be fully expended prior to year-end,’ the company said.

A2 Milk previously said it expected FY20 EBITDA margins to come in at 29-30%.

The company attributed this anticipated margin uptick to higher revenue, favourable USD/NZD currency fluctuations, and lower costs stemming from Covid-19 restrictions.

Mind you, management did flag that it is ‘unlikely that these factors will be sustained as these unprecedented circumstances begin to unwind.'

Overall, A2’s Board remains committed to targeting a 30% EBITDA margin over the medium-term.

A2 Milk share price: how investors responded

Unsurprisingly the a2 Milk share price traded in a relatively bullish fashion off the back of this news, with the stock up 1.97% -- to $18.67 per share, by 2:14 AEDT.

Possibly explaining why the stock didn’t rise by an even greater magnitude, on 14 April, Morgan Stanley argued that a2 Milk, then trading at 33x FY21 earnings 'looks rich to us, and we think the stock is pricing in an upgrade, leaving little room for error.'

The stock today got that upgrade.

How to trade a2 Milk: long or short

What do you make of this latest announcement: are you bullish or bearish on A2’s prospects? Regardless of your view, you can trade a2 Milk – long or short – using IG’s world-class trading platform now.

For example, to buy (long) or sell (short) a2 Milk using CFDs, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘A2M’ or ‘a2 Milk’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research 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.

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