Morgans says A2 Milk trading isn’t improvingWilliam...

Morgans says A2 Milk trading isn’t improving

William McInnes

Morgans has downgraded A2 Milk, saying its channel checks suggest that trading isn’t improving materially for the company.

The broker cut its recommendation from add to hold, and reduced its price target from $10.40 to $8.34.

“E-commerce platform pricing in China doesn’t appear to be materially improving and in Australia we have noticed that the retailers and pharmacies are discounting stock to clear ageing inventory,” said Morgans analyst Belinda Moore.

“Our industry feedback suggests that there has been no real improvement in the underlying operating environment. A2 Milk’s manufacturer, Synlait, recently said that visibility on A2 Milk’s outlook and the extent of its recovery remains low over 2H21 and FY22.

“Furthermore, we believe that there are structural changes being increased competition from Chinese companies such as Feihe and Junlebao which are winning market share and there is a declining birth rate in China.”

The broker said it would be hard for the company to achieve guidance in this environment.

“In light of the above, we can’t rule out the possibility of a fourth downgrade from A2 Milk,” said Ms Moore.

“To us, the fact that stock is being discounted, is slow to sell and is ageing, would suggest that A2 Milk has potentially a larger inventory issue than it has previously estimated.

“The company’s FY21 outlook assumed that its actions to re-activate the daigou/reseller channel delivers a significant quarter-on-quarter improvement in the 4Q21 vs the 3Q21. At this point, our channel checks would suggest that a large 4Q uplift is unlikely.”