A2 Milk outlook: What 3 top brokers thought of the interim results

A2 Milk share price falls following weak half

A2 Milk (A2M) delivered a horror set of interim results last Thursday, reporting weaker revenue and earnings as the coronavirus pandemic weighs heavily on the company’s operational performance.

The market responded bearishly to those results, with A2M opening 13% lower during Thursday’s session, at $9.00 per share. While the stock continued to fall on Friday, hitting a low of $8.51 per share, the a2 Milk share price has since rebounded modestly from that trough.

Interim results at a glance

While the company had previously flagged deteriorating market conditions, A2M’s interim results marked yet another guidance downgrade for the once fast-growing infant formula company.

Indeed, it was potentially the company’s revised FY21 guidance that irked investors and not the lower first-half revenues.

Looking first at those results, a2 Milk said it reported total first half revenues, for the year ending 31 December 2020, of NZD$677.4 million, implying a 16% decline on a year-over-year basis.

Breaking down that revenue result, Chinese & Asia and USA segment revenue grew slightly, coming in at NZD$326 million and NZD$34 million respectively. Australia and New Zealand segment revenue suffered heavy declines as a result of 'the challenges experienced in the daigou and retail channels, including the cost of inventory provisioning,’ the company flagged.

This all flowed onto the bottom-line, earnings (EBITDA) came in at NZD$178.5 million and the company's EBITDA margins, a closely watched metric, fell to 26.4%. Management said this was driven by 'lower revenue, a stock provision and adverse mix.'

Elsewhere, and underscoring the generally difficult operating conditions facing the company, inventories ballooned to NZD$198.6 million in the half, up NZD$51.2 million in just six months. The company said it anticipated inventory levels would normalised through the second half of FY21.

Warning shots fired

Management provided yet another downgrade at the H1. On the top-line, management said that it now expected FY21 Group revenues to come in at approximately NZD$1.4 billion (prior guidance: NZD$1.4-1.55 billion).

Earnings (EBITDA) margin expectations were lowered and tightened, with the company saying it expected full-year EBITDA margins of between 24-26% (prior guidance: 26-29%).

Analysts: Neutral, Buy, or Sell?

Citi has remained unconvinced by A2M's interim results, reiterating their Sell rating and lowering their price target to AUD$7.15 per share.

‘After 3 downgrades in a short space of time, a2’s credibility has taken a hit. However, we do not see the guidance of a 4Q pickup relative to 3Q as being unreasonable given the timing of the stockpiling in the pcp,’ the broker said.

Analysts from UBS, by comparison to Citi, have remained constructive on the company and its strategy, saying:

‘We believe A2M's plan to reactivate its daigou channel is logical, and centres on moderating English-label (A2 Platinum) supply to support a recovery in China online retail price and reseller margins.’

UBS has a Buy rating and a NZD$15.60 price target on A2M.

Finally, Macquarie analysts have taken a middle-ground approach, highlighting the uncertainty which the company still faces, while reiterating a Neutral rating and AUD$13.84 price target.

‘This is the third downgrade in six months, and material uncertainty remains around daigou resumption which will make the market question whether there is further downside risk,’ Macquarie analysts said.

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