A2 Milk share price: Why UBS reiterated their Buy rating

A2 Milk share price ↓

A2 Milk’s six month price chart is an illustration in the danger of trying to ‘catch a falling knife’.

Since October 2020, the A2 Milk share price has almost halved, falling approximately 46% in that period. A2M opened at $7.71 on Wednesday, 07 April, well off the 52-week high of $20.05 per share recorded in July.

The stock rose on Wednesday, if only a little relative to its longer-term weakness, gaining 2.01% by 1:45PM.

Why the sell-off? A series of downgrades, basically.

As part of the company’s recent interim result, A2 Milk handed down yet another revenue and earnings downgrade. In terms of revenue, the company said it now expected full-year FY21 revenue to come in 'the order' of $1.4 billion. That’s the lower-end of the company’s previous guidance, which was for full year revenue to come in at between $1.4 billion to $1.55 billion.

THe company also downgraded its full-year earnings, saying that it now expected full-year earnings (EBITDA) margins to come in at between 24% to 26%.

Mind you, even these assumptions were ‘stretched’, with the company noting that this outlook 'assumes the actions being taken to re-activate the daigou/reseller channel deliver a significant improvement in quarter-on-quarter growth from 3Q21 to 4Q21.'

Is the market pricing in the likelihood of the company does not deliver that significant improvement? At the very least, the share price declines witnessed over the last 12-months highlight that optimism around the stock is incredibly low.

The bull among the cows

Despite that, UBS remains upbeat, this week reiterating their Buy rating and NZD$16.00 price target on the stock.

While the investment bank concedes that tracking infant formula sales has become difficult due to the ‘disconnection from Australian exports as ATM manages down its inventory levels’, recent results from peer companies highlight a ‘sequential improvement in corporate daigou demand.’

Most importantly of all, while A2M remains in a downgrade cycle, UBS is confident that a recovery will materialise:

‘Our Buy rating is underpinned by expectations of a meaningful recovery in indirect IF sales in the next 2 years, plus substantial China IF share gains through its offline rollout and free trade zone expansion.’

In saying that, UBS suggests that the market is likely being overly dramatic with its current A2M valuation, with the company’s current trading multiples suggesting that there is ‘no recovery priced in.’

UBS expects A2 to deliver revenue of NZD$1,383 million in FY21, before returning to growth in 2022.

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