A2 Milk share price: UBS maintains buy rating heading into H1 results

A2 Milk share price at a glance

It’s been a good week for a2 Milk (ASX: A2M) shareholders. In the last five sessions the A2M share price has risen a shade over 5%, closing out the week at $15.50 per share.

All up, this has proven to be quite a reversal of fortunes for the company; last November the stock hit a low of $11.31 per share.

Past price volatility aside, the investment bank UBS has today taken the chance to reiterate their 'buy' rating on a2 Milk. UBS has also retained their previously set share price target of NZ$17.00 per share.

The company is expected to release their first-half results on February 27.

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UBS: the new and old view

Recent data compiled by UBS looks to have reaffirmed the broker's already bullish stance on the IMF company.

Here it was noted that:

‘A2 Platinum share of best sellers was up ~570bp [...] year-on-year over 2QFY20 and pricing was ~steady, plus competitive behaviours should support CBEC share [and] Port export data: points to 1H20 volume growth of ~26% vs. UBSe +23% y/y, assuming steady h/h inventory.’

This is not to say questions around A2’s growth prospects don’t remain, with UBS analysts pondering three central questions that are likely to impact the company moving forward. Centrally, these questions are:

'What is a realistic long-term share of the China IMF market' for A2?, 'what level of profitability can A2M retain to achieve share aspirations'?, and ‘does CEO turnover suggest risk to the strategy?'.

In saying that, A2's long-term growth profile is a favourable one – according to UBS. Revenue and earnings are expected to grow significantly in the coming years, while margins are expected to remain stable.

Looking at the specifics, UBS posits that A2’s revenue will rise from NZ$1,670.2m in FY20e to NZ$2,732.3m in FY23e. Earnings are expected to climb in-step, with net earnings forecast to come in at NZ$346.5m in FY20e and NZ$579.7m in FY23e.

Earnings (EBIT) margins are also expected to remain stable over the coming years, according to UBS, currently expected to hit 29.5% in FY20e, 29.2% in FY21e, 28.7% in FY22e and 29.7% in FY23e.

Though UBS may be positive on A2M's outlook, this is not a view held by all brokers.

For example and at the other end of the spectrum, Citi analysts ultimately believe that over the medium-term A2M's margins will contract as Chinese IMF competition increases and as a 'shift to direct channels' occurs.

In saying that, Citi has moderated their bearish stance in recent times: just this week upgrading their rating from ‘sell’ to ‘neutral’ and upgrading their 12-month share price target from $12.30 to $14.85 on a2 Milk.

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