A2 Milk share price: why UBS sees further upside

We examine why analysts from UBS see further upside for the stock ahead of its full-year results.

When will the company report its FY20 results?

Fresh milk and infant formula dairy company a2 Milk (A2M) is set to report its full-year (FY20) results next Wednesday, 19 August.

A2 Milk share price: analysts remain bullish

Heading into a2’s full-year results release, the sell-side remains bullish on the company’s prospects, with the stock commanding and Overweight rating, on average, according to the Wall Street Journal. Though analysts may currently favour the stock, its ultimately been a volatile year for the company – with the a2 Milk share price trading between $11.28 per share and $20.05 per share over the last 52 week period.

On a more granular level, A2M currently has 5 Buy ratings, 1 Overweight rating, 2 Hold ratings, 1 Underweight Rating and 2 Sell ratings, also according to the Wall Street Journal.

Analysts from Swiss investment bank UBS – which have remained bullish on A2M for some time now – recently reiterated their Buy rating and NZ$22.00 per share price target on the stock.

Overall the investment bank said it expected the company to beat expectations at the FY20. Here, UBS analysts said:

‘Pulling together the data mosaic across A2M's sale channels and operating costs points to a potential FY20 consensus EBITDA beat of ~4% driven by stronger margins.’

For reference, in April, A2M upgraded their full-year earnings (EBITDA) margin expectations to between 31-32% – a figure which factored in a planned marketing spend of approximately NZ$200 million. UBS however expects the company’s costs to come in lower than guided as a result of Mom and Baby Stores (MBS) closures – contributing to the above highlighted earnings beat.

Looking forward, the investment bank argued that the company remains well placed to capitalise on the Chinese infant formula market, saying:

‘Our analysis suggests A2M enters FY21 with a record CBEC market share in July and MBS sales ahead of pre-COVID-19 helped by a larger store footprint.’

Overall, UBS is currently forecasting that A2M will report FY20 revenues of NZ$1,741 million, against EBIT of NZ$556.7 million and net earnings of NZ$392.5 million

Other bits and pieces

Elsewhere, a2 Milk recently announced the appointment of its new Managing Director and Chief Executive Officer: Mr David Bortolussi. Mr Bortolussi has significant senior management experience, most recently working as Group President of International Innerwear at HanseBrands.

Mr Bortolussi is set to take the reigns during the early parts of CY21.

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