The A2 Milk Company: Uncertainty could overhang

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
19 November 2020, 9:50 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • The a2 Milk Company (ASX:A2M) has maintained guidance at its AGM. While highly qualified and requiring a material 2H21 improvement, commentary on initial signs of a recovery in corporate daigou demand and improving daigou channel inventory are encouraging.
  • For conservatism, we have now moved our FY21 EBITDA forecast ~4% below the lower end of its guidance range.
  • While earnings uncertainty remains, A2M’s share price may remain subdued, however we continue to believe the company is well placed over the medium to longer term and maintain an Add rating with a new PT of (login to view updated price target).

1H21 and FY21 guidance is maintained…

The a2 Milk Company (ASX:A2M) has maintained its 1H21 and FY21 guidance provided on 28 September. As a reminder, 1H21 revenue is expected to be NZ$725-775m, down 4-10% on 1H20. FY21 revenue guidance is NZ$1.8-1.9bn (+4.0-9.8% on FY20) and the EBITDA margin is expected to be c31%, implying EBITDA of NZ$558-589m, +1.1-6.7% on the pcp.

… but is highly qualified; requires material 2H21 improvement

A2M noted that there remains uncertainty to its forecast and acknowledged the material improvement in 2H21 required (16-22% revenue growth on 2H20). We note A2M will be cycling a very strong 3Q20, which benefitted from COVID-19 pantry stocking and FX tailwinds.

The 2H improvement remains dependent on a number of key assumptions, particularly an improvement in the daigou channel and continued growth in its China labelled product through the MBS channel. On a monthly basis, A2M’s revenue guidance implies 1H21 revenue falls to NZ$120-129m/month (vs. NZ$154m/month in 2H20) before rebounding to a record run-rate of NZ$179-187m/month in 2H21.

Pleasingly, A2M’s China brand metrics remain strong, with MBS market share rising to 2.2% (vs. 2.0% in Jun-20) and brand awareness and loyalty increasing.

Few surprises in regional update comments

ANZ: A2M reiterated the challenging 1H21 trading conditions following the contraction in the daigou/reseller channel, particularly the impact of Victoria’s Stage 4 restrictions on the corporate daigou. These headwinds are expected to moderate over the balance of FY21. Positively, A2M noted it is seeing initial signs of a recovery in the corporate daigou in recent weeks following the launch of its new incentive program and the easing of Victoria’s lockdown restrictions.

Asia: While not quantified, A2M reiterated MBS sales growth has been strong YTD (was +77% Sep-20 YTD) driven by both growth in its distribution footprint and increasing sales velocities. Its 11/11 sales performance was in line with its expectations, with English label IF sales volume +24% and strong brand and product rankings achieved.

North America: FY21 EBITDA loss to reduce on FY20 (in line).

Forecast changes

Given uncertainty over the extent of the 2H21 recovery, we have revised our forecasts and sit below guidance with revenue of NZ$1,731m and EBITDA of NZ$537m. Our FY21 NPAT forecast has fallen 7.2% to NZ$375m (down 3.3% on FY20).

While our FY22/23F forecasts have been rebased lower, we forecast a solid 7.8% NPAT CAGR over FY21-23 driven by a recovery in the corporate and retail daigou as COVID-19 restrictions ease and ongoing growth in the China and North American businesses from increased distribution and higher sales velocities.

Its possible our forecasts could prove conservative if the daigou channel does in fact improve at the rate A2M anticipates in the 2H21.

Investment view – Add rating and updated price target (login to view updated price target)

While AGM commentary was better than feared, guidance is highly qualified and 2H21 growth expectations do appear ambitious. However, A2M’s comments on improving daigou channel inventory are encouraging and provide scope for strong restocking activity if demand continues to recover.

We continue to view A2M’s current challenges as transitory and its depressed share price provides an attractive opportunity to gain exposure to a high quality growth company with an enviable balance sheet position.

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