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Morningstar report today nz
Latest recommendation reportValuation: $15.00Last updated:19/09/19A2 Milk's Investor Day Highlights Long-Term Opportunities, and Supports our Narrow Moat RatingInvestment ratingWhile A2 Milk's highest-growth days are behind it, we still expect solid future gains, with market share opportunities in Chinese infant formula, U.S. fresh milk, and global follow-on dairy products supporting our outlook for 15% annual earnings per share growth over the next decade. And with minimal capital investment needs, A2 is set to enjoy stellar returns on invested capital and strong free cash flow. We think the company has carved out a narrow economic moat, owing to its brand intangible assets. However, the future success of the firm relies mostly upon developments in the Chinese infant formula market, where we estimate A2 generates more than 80% of its earnings through both direct sales and Australian third parties. We expect the firm's market share to climb to about 15% over the next 10 years from more than 6% in fiscal 2019 but continued competition and increased marketing needs present near-term risks.EventImpactRecommendation impact (last updated: 19/09/2019)--Event analysisA2 Milk's Investor Day Highlights Long-Term Opportunities, and Supports our Narrow Moat RatingNarrow-moat A2 Milk's Investor Day in Shanghai Sept. 17 to 18, was long on passion, ambition, and imagination, but short on financial details. The particular lack of data offered in measuring the firm's recently stepped-up marketing and personnel investment program clearly disappointed the market, sending shares down some 8% over the course of the event. But we walked away with unchanged confidence in the company's stellar long-term growth opportunity. We anticipate A2's short-term profitability sacrifices needed to capture further market share gain--particularly in Chinese infant formula--combined with sustainable and strong brand intangible assets will drive 15% compound annual underlying EBIT growth for the next decade. We maintain our NZD 15.00 (AUD 14.20) fair value estimate, with shares screening as slightly undervalued.China remains A2's primary growth driver, and we were impressed by the strategy outlined by new regional head Li Xiao. The firm plans to increase local sales personnel to reach greater and deeper penetration of Mother and Baby Stores, or MBS, while also lifting marketing spend as outlined following fiscal year results in August. These investments, along with innovation such as a planned launch of Hong-Kong labelled product to better access the neighbouring Guangdong province, support our view for the company's market share to increase to of 16% by fiscal 2029 from about 6% today.Reaching beyond A2's historical growth channels of daigou and cross-border e-commerce will be critical, as 70% to 75% of infant-formula sales in China are offline in MBS and traditional retail. At present, A2's Chinese-language labelled product is available in 16,400 MBS, up from 3,800 in June 2017, out of more than 100,000 across the country. The firm isn't likely to access all of these distribution points in the near term--many are independent shops in lower-tier cities with sizable domestic-brand presence and limited shelf space--but the runway remains long.