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

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Seize a share opportunity today

Go long or short on thousands of international stocks.

  • Increase your market exposure with leverage
  • Get spreads from just 0.1% on major global shares
  • Trade CFDs straight into order books with direct market access

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.


Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.