AgM update, page-161

MorningStar just updated their recommendation on A2M/ATM. Moved from "Accumulated" to "Hold"

Event analysis

A2 Milk's Upgraded Guidance Tracks Our Long-Term Expectations; Shares Remain Undervalued
A2 Milk's updated outlook at its annual general meeting meets our full-year fiscal 2020 top-line forecast, but exceeds our operating earnings estimate. While this improvement has no bearing on our long-term assumptions, we're encouraged by further success driving market share gains while also lifting price--hallmarks of a2's narrow economic moat. Moreover, the company outlined a new remuneration plan which better aligns management incentives with shareholders', and extended its infant formula production agreement with partner Synlait. We lift our fair value estimate to NZD 15.30 (AUD 14.50) from NZD 15.00 (AUD 14.20) due to the time value of money, with shares trading at a slight discount.

A2 is on-track to meet our lofty top-line targets. Management expects revenue in the first half of fiscal 2020 in a range of NZD 780 million to NZD 800 million, including infant formula revenue of NZD 640 million, suggesting about 29% growth in both versus the previous corresponding period. These figures align with our full-year growth forecasts of 30% for infant formula and 28.5% for consolidated revenue. We continue to expect a2 can capture about a point of infant formula market share annually on top of its current 6% in China. While this suggests slowing in the medium term, it still leads to double-digit annual growth in the product over the next decade.


The firm's EBITDA margin for fiscal 2020 is now expected to be 29% to 30%, slightly higher than previous guidance of about 28%, tracking closer to our unchanged long-term margins of about 32%. Encouragingly, this improvement is from successful price increases and favourable cost of goods movements, not a reduction of marketing expenses--which could undermine longer-term profitability. Management targets about NZD 200 million of marketing spending in fiscal 2020, matching our forecast. We think this investment, which steps-up to about 12% of sales from 10% in fiscal 2019, is needed to support the revenue opportunity we see.


For me, I am still accumulating.