May 2021 Downgrade - Broker Moves

Forsyth Barr commentary

The a2 Milk Company (ATM) downgraded FY21 guidance for the fourth time since September 2020, with no signs of a turnaround in well-signalled issues, meaning ATM is taking greater corrective action at the expense of short-term profit. ATM has a number of redeeming features, including strong free cashflow, attractive returns, a highly-regarded brand and optionality provided by a net cash position.

However, the substantial re-basing of earnings and feasible future growth has been rapid and painful. Opaque/complex channels to market, an increasingly difficult macro backdrop and a strategy review amplify the near-term uncertainty. Any signs of a stabilisation in infant formula (IF) revenue and/or return to growth could be a positive catalyst, however, we think this is still some time away. NEUTRAL.

What's changed?

Earnings: Medium-term underlying EBITDA lowered -25% to -35%, with FY21E magnified by inventory provisioning.

Target price: Lowered to NZ$7.50 (-32%), consistent with longer-term earnings cuts.