A2 Milk shares rated both 'outperform' and 'sell' as views on outlook diverge

Wednesday 8th August 2018

Views on the outlook for The a2 Milk Company, the best performing stock on the S&P/NZX 50 Index last year, are widely divergent with one broking house this week reinstating an 'outperform' rating based on its potential for future global growth, while another downgraded it to 'sell' saying excess product is starting to build in Australia.

A2 Milk, which markets milk with a protein variant said to have health benefits, has had a meteoric rise in recent times, cracking a major milestone in February when it became the largest listed company in New Zealand by value, as its infant formula in China and liquid milk in Australia surged in popularity. At today's price it is valued as the fourth-largest New Zealand listed company although opinions on its future are mixed.

In an Aug. 6 research note, Forsyth Barr analysts Chelsea Leadbetter and Matt Dunn reinstated their 'outperform' rating on the stock, saying the specialised milk marketer has a key opportunity to evolve into a global dairy nutrition company broadening its product range, markets and position. While there are threats from growing competition, a2 products command a premium because of the company's sole a2 focus and its Australia and New Zealand base, they said.

"ATM has a product in demand and, despite unprecedented success to date, has only scratched the surface of the potential market in our opinion," they said. "Recent insights are predominantly positive to growing demand, while investment should support longer-term growth."

However also this week, Citi research analyst Sam Teeger downgraded his a2 rating to 'sell' in an Aug. 7 report, noting that while a2 is an exceptional brand with international potential, there are risks to expectations for its future growth given excess inventory appears to be building in multiple channels.

"A2 is emerging from multiple years of excellent execution," Teeger said. "However falling Australian daigou store prices and increasingly dated manufacturing dates suggests excess inventory is likely building domestically. Despite its strong brand, we downgrade our recommendation to 'Sell' as we see downside risks to consensus FY19e sales growth expectations of 35 percent."

A2 Milk is due to report its annual earnings on Aug. 22, and the company said last month that annual sales lifted 68 percent to $922 million and it expects to maintain an earnings margin of about 30 percent in the coming year even with increased spending.

In mid-afternoon trading today, the company's shares slipped 0.8 percent to $10.47, having so far this year traded as low as $7.68 in January and touched a high of $14.62 in February. The stock has gained 31 percent so far this year, outpacing a 5.7 percent gain in the benchmark index.

(BusinessDesk)

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