Article from AFR: At least they got the view of another...

Article from AFR:
At least they got the view of another long-term analyst from Milford other than Citi's Mr Teegan


Is A2 Milk's cash cow about to dry up?Carrie LaFrenzSenior reporterSep 7, 2020 – 12.00amSaveShare

The a2 Milk Company has been a market darling for many years, growing into a dual-listed ASX/Top 50 giant with its market capitalisation ballooning to more than $12.8 billion.While a2 Milk launched liquid milk in 2008, its a2 Platinum baby formula is the powerhouse of the company. Total sales jumped nearly 33 per cent to $NZ1.7 billion ($1.6 billion) last financial year as formula sales more than doubled and distribution expanded in China.Its China mother and baby store distribution also nearly doubled to over 19,000 sites in just two years.A2 Milk appointed David Bortolussi to replace a well-respected CEO. Net profit jumped 34 per cent to $NZ385.8 million as earnings per share rose more than 33 per cent to NZ52.39¢ in the 12 months ended June 30.

As travel bans were enforced and tourists and international university students dried up, the pandemic hurt the daigou retail trade – the informal exporters who buy infant formula and other products locally and despatch the goods to China themselves.But a2 is one company that benefited from COVID-19 as people stocked up on pantry items amid the pandemic rush. Now it is facing a short-term excess inventory crunch, but Milford Asset Management fund manager William Curtayne is not worried."We overall are still positive on the company but I think they have to work through overstocking and inventory in the coming months, and that may take some momentum out of the share price," said Mr Curtayne, who has been an a2 Milk shareholder since 2012, and remains a large holder of the stock.While a2 Milk has had great success, analysts are split on its future prospects with eight buys, five sells and three holds. The stock has come off in recent months. It is trading around $16.70 – down from its all-time high of $19.94 in late July, but about 36 times higher than its all-time low of 46.5¢ hit in May 2015.Attractive multipleUBS analysts said a2 Milk's price-earnings ratio looked attractive, given it was trading on a forward multiple of about 30 times 2021 earnings. They reiterated a "buy" rating on the stock.But Citi analyst Sam Teeger recently downgraded his call to "sell" from "buy"' and slashed his target price by 20 per cent to $17.20. He believes the outlook is increasingly risky given a resurgence of local brands in China. He also noted the risks of the evolving regulatory landscape and increasingly delicate political relationships between Beijing and the West.Smaller baby formula maker Bubs chief executive Kristy Carr also recently confirmed there was ''renewed pride'' among Chinese consumers about purchasing locally made infant formula.In a2 Milk's favour, it is exposed to two growing markets: China is its biggest opportunity and the US is a growing opportunity in liquid milk. It also has strong partnerships. In 2012, it formed a manufacturing agreement with Synlait Milk (in which it now owns a 19 per cent stake) and has also formed a strategic partnership with state-backed China State Farm Holding Shanghai Company for distribution in China.A2 Milk has remained largely unaffected by rivals creeping in on its space such as Wyeth's Illuma Atwo, Karicare A2 Protein Milk and Danone China launching two new products for its Aptamil Essensis 3 range, including an A2 milk.

But Mr Teeger warned more consumers are aware of the A2 proposition, and the expansion of the Chinese A2 dairy herd means that both new foreign and domestic brands entering the category present a higher competitive threat to a2 Milk than before."China is no longer being solely reliant on imports for A2 product," he said.Milford's William Curtayne is looking through the short term bumps. Louise KennerleyMr Teeger flagged recent share sales by key management, which, he says, do "not inspire confidence in a2’s outlook" and come at a time where he sees the company facing some challenges.Milford's Mr Curtayne disagreed."If it was any other stock we would be very concerned about the recent selling but given a2's track record of key personal selling down over past years, this doesn't worry us as much as it normally would," he said.Mr Curtayne also backed the company's recent move down the supply chain after a2 Milk lobbed a $NZ270 million bid for a majority stake in New Zealand dairy nutrition business Mataura Valley Milk."A2 have a huge balance sheet, a lot of cash sitting there, and by putting that into manufacturing it helps de-risk the business some. We think it's a prudent move," he said.The a2 recently appointed Hanesbrands' executive David Bortolussi as its new chief executive, Current CEO Geoff Babidge will retire, taking a large amount of knowledge and expertise with him. But investors do not seem concerned by this transition."We think he is more along the lines of Geoff Babidge," Mr Curtayne said. "He has cut his teeth working real businesses over the past decade. (Former CEO) Jayne Hrdlicka came from very high-profile roles at Bain and Jetstar . . . and she played a key role at a2, but now that has played out, and we think the board is happy to focus on the core brand and focus on China, now that the US strategy is in place."Time will tell if Mr Babidge will consider taking a board seat, and remain involved with the company he helped to found.Carrie LaFrenz has more than 10 years' experience as a business journalist having previously covered healthcare, retail/consumer goods, industrials and agribusiness. She is based in our Sydney newsroom. Connect with Carrie on Twitter. Email Carrie at carrie.lafrenz@copyright link