Ann: FY24 Results commentary and outlook, page-96

https://www.morningstar.com/company-reports/1239461-a2-milk-earnings-market-share-soars-but-near-term-outlook-sours?listing=0P0000CD1Q&utm_medium=referral&utm_campaign=linkshare&utm_source=link

Stock Analyst Note

A2 Milk Earnings: Market Share Soars, but Near-Term Outlook Sours

Angus Hewitt

Aug 19, 2024

We think the precipitous slide in the a2 Milk share price—down more than 20% during intraday trading—misses the forest for the trees. A2’s fiscal 2024 result itself was strong with underlying net profit up 8% to NZD 234 million—about 4% ahead of our prior forecast. Its share of the crucial Chinese infant formula market is also climbing and already healthy brand metrics continue to improve. Consumers are willing to pay up for the a2 brand, in fresh milk in Australia and infant formula in China. This pricing power has afforded market share growth despite difficult conditions—underpinning the firm’s narrow economic moat. But we think the market was overly concerned about a weaker near-term outlook statement. Temporary, operational supply constraints—ostensibly with manufacturing partner Synlait—are set to weigh on sales in the first half of fiscal 2025 and gross margins are set to suffer amid a short-term reliance on air freight. The supply constraints are transient, likely abating by the end of the first half of fiscal 2025. We think the share price fall presents an attractive entry point for investors.

The company expects mid-single-digit revenue growth in fiscal 2025, compared with our prior 9% growth forecast. Given gross margin freight headwinds, management also guides to roughly flat EBITDA margins. We lower our fiscal 2025 net profit forecast by 12% to AUD 178 million—representing about 6% growth on fiscal 2025. We also lower our fiscal 2026 net profit forecast by about 4%, principally as Matura Valley Milk appears set to break-even about a year later than previously expected. Our fiscal 2027 net profit forecast is unchanged. We maintain our NZD 8.00 fair value estimate. We modestly lower our valuation for Australian-listed shares by 3% to AUD 7.20 on currency movements.