Why UBS thinks the a2 Milk share price won’t be impacted by CEO exit
As a2 Milk’s CEO steps down, UBS reiterates their buy rating and share price target on the fast-growing infant formula company.
The theory that markets are efficient, that is, that the prices of assets reflect all available pieces of information, is an ever interesting one.
The one caveat to this theory of course is news. News flow – in markets – after all represents new and inherently unpredictable information.
Yesterday’s revelation that A2M’s MD and CEO Jayne Hrdlicka would be stepping down, immediately blindsided many. Investors seemed ‘shocked’ – in so far that the a2 Milk share price was clobbered – dropping as much as 6% as the markets revalued the stock based on this new information.
Were investors immediately worried that a2 Milk – a company well versed in executing on its vison (having grown its revenue from NZ$42m in FY11 to NZ1.3bn in FY19) – could no longer make good on its goal of ‘conquering’ the Chinese IMF market without Hrdlicka at the helm?
Benjamin Graham – arguably the most influential investor in history once said:
‘In the short run, the market is a voting machine but in the long run it is a weighing machine.’
It is telling then that today the a2 Milk share price rebounded sharply, up around 2% to $14.28 per share by 11:40 AEDT. The S&P500/ASX 200 by comparison was down.
A2 Milk share price: UBS still says ‘BUY’
Regardless of what the market is doing, UBS seems to be taking the long-run view, today reiterating their BUY rating and 12-month price target of NZ$17.00 on the IMF player.
That’s not to say questions don’t remain over A2M’s prospects or ability to execute on its strategy, mind you. The investment bank, canvasing three central questions pondered: how much IMF market share can A2M capture, what levels of profitability can a2 Milk eventually attain, and does this C-suite shakeup pose a risk to A2M's growth strategy?
In saying that, UBS was quick to point out that the company reiterating its FY20 guidance looks to have helped steady the ship somewhat. On the earnings front, even without Hrdlicka in the top spot, it would be business as usual, according to A2's management.
Specifically, it was again pointed out (from figures already revealed at a2 Milk’s recent AGM) that the company was expecting:
'Revenue in the range of $780 million to $800 million with growth demonstrating strong performance against strategy. EBITDA margin % in 1H20 is expected to be in the range of 31-32% whilst the FY20 EBITDA margin is expected to be in the range of 29-30%.'
It was further pointed out that:
'All other key financial performance and balance sheet metrics remain strong and within our expectations.'
UBS analysts look to have taken solace in the reiteration of these figures, and still estimate double-digit earnings (EPS) growth between FY20 to FY23.
Other factors, such as having ex-CEO Geoffrey Babbidge at the helm on an interim basis and the Board's emphasis on balancing growth with cost efficiencies, also informed UBS’s reiteration of their BUY rating.
Consequently, UBS noted that it has made no modifications to its DCF model.
Practise trading Australian stocks with an IG demo account now
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.
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. Please see important Research Disclaimer.
Please also note that the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.
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
See more forex live prices
See more shares live prices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.
See more indices live prices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.