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.
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