The A2 Milk Company: Uncertainty could overhang
About the author:
- 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
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
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
North America: FY21 EBITDA loss to reduce on FY20 (in line).
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.
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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