broker Upgrades A2m

Description: Research FINAL copy.jpg AGRICULTURE/FMCG The a2 Milk Company (A2M.AX) Multiple growth levers Started well and laying the foundations for FY19-20e: The recent 4M18 trading update for A2M continued to highlight a high growth business (revenue growth of +69% YOY, EBITDA growth of +121% YOY and NPAT growth of +138% YOY) with further progress being made on expanding its distribution footprint in the US (+600 stores since Jun’17 and a doubling in its presence since Jun’16) and China (from ~1,450 in Jun’16 to ~5,800 currently). Despite delivering strong trading results and favourable signals for future growth (note we upgraded EPS by 4-7% over FY18-20e at the time of the announcement) the stock price has fallen ~5% and this is creating a buying opportunity in our view. Modest upgrade to target price: We make no changes to our earnings forecasts, but raise our target price to A$8.30ps (prev. A$8.15ps) reflecting recent moves in the AUDNZD and the natural roll forward in our valuation model. Investment view: Upgrade to Buy: Following the recent share price consolidation we upgrade our rating from Hold to Buy. Over the next 12-24 months we see a number of key growth catalysts for A2M being: (1) an acceleration in China IMF sales as brand rationalisation post Jan’18 favours brands which have achieved CFDA registration. In our view if A2M can bridge the gap between its on-line and off-line market share positions there is material upside to volume projections in FY19-20e; (2) an acceleration in demand for the existing range of a2 branded adult nutrition powders (WMP/SMP sachet packages) and the potential for a launch of more advanced formulations (eg. Fortified milk powders); (3) an acceleration in the distribution reach of fresh dairy products in the US reducing losses in this market in FY19-20e: and (4) the potential for higher margin products to be added to the existing UK portfolio (infant and adult nutrition). We continue to see A2M as having a number of growth levers at its disposal over FY18-20e while at the same time reviewing options for capital management in light of the strong levels of operating cash realisation. Recommendation: Buy (prev. Hold) Previous Close: $7.09 Price Target: $8.30 (prev. $8.15) Jonathan Snape