Sam Teeger
Citigroup
Citi analyst Sam Teeger said Reckitt’s divestment points to market consensus of long-term a2 Milk earnings before interest and tax margins possibly being too optimistic at 22 per cent by fiscal 2024 – particularly given its increasing focus on the offline channel.Reckitt indicated its China baby formula business had an EBIT margin of 10 per cent in fiscal 2020.“The divestment may be a sign that prospects for long-term success in the Chinese IMF market may be increasingly challenging for foreign brands, and a2 may benefit from increasing its attempts to geographically diversify,” Mr Teeger said.ADVERTISEMENTCONTENT RESUMES ON SCROLLAdvertisementHe said a2 Milk’s increasing focus on driving growth out of its China label formula could hit margins, given the offline channel has lower profitability and a2 Milk would need to invest more in marketing/promotions to compete with larger competitors.He has a “sell” call on a2 Milk, which posted its fourth profit warning in nine months in early May and another large stock provision.Sales expectations for the year were culled to between $NZ1.2 billion ($1.1 billion) and $NZ1.25 billion, down by at least 28 per cent year-on-year. It is also reviewing its China business.A2 Milk cut margin guidance to between 11 per cent and 12 per cent compared to the already lowered 24 per cent to 26 per cent previously, and now implies a second-half EBITDA loss of $NZ42.1 million.A2 Milk, along with other companies reliant on daigou personal shoppers who take goods like formula and vitamins from Australia to consumers in China, were significantly hurt when they disappeared in the wake of COVID-19. A2 Milk lost about $NZ250 million worth of daigou sales in Australia.Mr Teeger assumed that if the daigou channel recovered to 50 per cent of the 2020 levels, then a value per share of $6.54 for a2 Milk is implied. The stock closed on Tuesday at $5.70 each, or 12¢ lower. Less than a year ago it was hovering about $20.AdvertisementMr Teeger said more upside exists should a possible suitor take interest and have a more favourable view on the daigou recovery. But given a2 Milk does not have any local production assets (unlike Reckitt), its increased reliance on a single product and lower market share may prove less appealing for a buyer, he said.What was meant to be a big win for all infant formula players was China’s recent change to its birth control policy to allow three children, from two, in order to try to arrest the shrinking birth rate.On Weibo, when the policy was announced, users complained of mounting education expenses, sky-high housing prices and unforgiving work hours.Mr Teeger was also sceptical about the upside for a2 Milk and smaller rival Bubs, given the potential birth rate increase may be skewed to lower tier cities, which are typically dominated by domestic brands such as Feihe and Junlebao, which are winning market share amid increased nationalism.Fewer women of childbearing age and the high cost of raising children in major cities were also concerns.Citi’s China economists expect the new policy to add only 300,000 babies a year from calendar year 2022 onwards.
https://www.tipranks.com/analysts/sam-teeger
(20min delay)
