A2 Milk shares rated both 'outperform' and 'sell' as views on outlook diverge
By Tina Morrison
Aug. 8 (BusinessDesk) - Views on the outlook for The a2 Milk Company, the best performing stock on the S/NZX 50 Index last year, are widely divergent with one broking house this week reinstating an 'outperform' rating based
on its potential for future global growth, while another downgraded it to 'sell' saying excess product is starting to
build in Australia.
A2 Milk, which markets milk with a protein variant said to have health benefits, has had a meteoric rise in recent
times, cracking a major milestone in February when it became the largest listed company in New Zealand by value, as its
infant formula in China and liquid milk in Australia surged in popularity. At today's price it is valued as the
fourth-largest New Zealand listed company although opinions on its future are mixed.
In an Aug. 6 research note, Forsyth Barr analysts Chelsea Leadbetter and Matt Dunn reinstated their 'outperform' rating
on the stock, saying the specialised milk marketer has a key opportunity to evolve into a global dairy nutrition company
broadening its product range, markets and position. While there are threats from growing competition, a2 products
command a premium because of the company's sole a2 focus and its Australia and New Zealand base, they said.
"ATM has a product in demand and, despite unprecedented success to date, has only scratched the surface of the potential
market in our opinion," they said. "Recent insights are predominantly positive to growing demand, while investment
should support longer-term growth."
However also this week, Citi research analyst Sam Teeger downgraded his a2 rating to 'sell' in an Aug. 7 report, noting
that while a2 is an exceptional brand with international potential, there are risks to expectations for its future
growth given excess inventory appears to be building in multiple channels.
"A2 is emerging from multiple years of excellent execution," Teeger said. "However falling Australian daigou store
prices and increasingly dated manufacturing dates suggests excess inventory is likely building domestically. Despite its
strong brand, we downgrade our recommendation to 'Sell' as we see downside risks to consensus FY19e sales growth
expectations of 35 percent."
A2 Milk is due to report its annual earnings on Aug. 22, and the company said last month that annual sales lifted 68
percent to $922 million and it expects to maintain an earnings margin of about 30 percent in the coming year even with
In mid-afternoon trading today, the company's shares slipped 0.8 percent to $10.47, having so far this year traded as
low as $7.68 in January and touched a high of $14.62 in February. The stock has gained 31 percent so far this year,
outpacing a 5.7 percent gain in the benchmark index.