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A2 Milk share price: what do 3 of Australia’s top brokers think?

A number of Australia’s top brokers remain mixed on a2 Milk following the release of strong 2019 full-year results last week.

A2 Milk’s share price has continued to tumble, falling some 16% following the release of its FY19 results on August 21.

In response to a2 Milk Co Ltd’s 2019 results, a number of Australia’s top brokers have taken a mixed view on the stock, with ratings ranging from neutral to buy.

A2 Milk share price: what sparked this sell-off?

As we previously reported, it looks to be a combination of an earnings miss and an elevated valuation that led to bearish activity around the A$9.7bn milk company following its FY19 results release.

For one, a2 Milk missed analyst earnings guidance by a small margin, with the company reporting earnings (EBITDA) figures 2.7% below the average analyst consensus, according to Bloomberg Data.

Moreover, though a2 Milk has seen its valuation contract somewhat following the release of its full-year results – the company continues to trade ahead of the broader market – commanding a price-to-earnings ratio (PE) of 35.8, when compared to the ASX 200’s PE ratio of 19.05.

What are analysts saying?

Mind you, though a2 Milk’s share price has suffered in the wake of these results, the analyst outlook, generally remains positive, if somewhat mixed.

According to the Wall Street Journal, of the 12 analysts covering the company six rate it a buy, three rate it a hold and three rate it a sell.

Below we take a look at what some top brokers currently think of a2 Milk (ASX: A2M).

Citibank remains neutral

Citibank has slapped a neutral rating and a 12-month price target on a2 Milk following the release of its full-year results.

Though a2 Milk reported earnings (EBITDA) below average analyst estimates, the company also flagged an increased marketing spend in FY20, as it races to grow market share in the US and China.

While Citibank views this increased investment as making ‘strategic sense’, the bank has also flagged that a2 Milk’s current 6.4% market share of China may represent the maximum potential for the company in its current formation.

New products or acquisitions may be required for a2 Milk to grow its market share further, says Citibank.

At least, as the investment bank points out: a2 Milk has significant capital to pursue such agendas, with A$465m cash on hand.

Morgans puts a ‘hold’ rating on a2 Milk

Though a2 Milk’s results were in-line with management’s previous guidance, the company’s earnings (NPAT) undershot Morgans own estimates by a sizable 4.9%.

Moreover, while the company boasts a strong brand, a solid balance sheet and is operating in a fast-growing market, Morgans sees near-term risk as it relates to a2 Milk’s ability to grow its revenue at a reasonable cost in the future.

Finally, with a2 Milk’s above-market FY20 price-to-earnings ratio of 33.2, Morgans has maintained a hold rating and placed a 12-month price target of A$13.73 on the stock.

UBS sees growth: ‘buy’

By comparison to Citibank and Morgans, UBS remains bullish on a2 Milk Co Ltd; though the broker pointed out that FY20 margin guidance was materially weaker than expected.

Ultimately, the bank appreciates the ‘future proofing’ endeavours currently being led by CEO Jayne Hrdlicka. Investments in US and China expansion, a focus on building a strong workforce and an emphasis on growing brand visibility – all rank as key positives.

Even when considering a2 Milk’s slight FY19 earnings miss, UBS believes its core investment thesis remains in-tact. Consequently, the bank has reiterated its buy rating, but put a slightly revised NZ$17.10 price target on the stock (down from NZ$17.50).

Year-to-date, a2 Milk (ASX: A2M) has now seen its share price rise some 27%.

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. See full non-independent research disclaimer and quarterly summary.

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