A2 Milk shares gain on guidance upgrade, dividend policy
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The news: A2 Milk shares extended gains on the ASX after lifting its full-year revenue guidance and announcing the implementation of a dividend policy on Friday.
The numbers: A2 Milk shares were up 2.8% to $5.60 by 1pm AEDT, having gained 13.3% in the previous session.
Analysts made the following revisions to their coverage on A2 Milk following Friday's trading update:
- Jarden kept its 'overweight' rating and increased its target price from NZD7.25 ($6.50) to NZD7.35;
- Macquarie retained its 'neutral' rating but cut its price target from $5.90 to $5.70;
- Bell Potter reiterated its 'hold' rating and reduced its target price from $6.10 to $6;
- Wilsons Advisory maintained its 'market weight' rating and decreased its target price from $5.97 to $5.75; and
- Morningstar left its fair value estimate unchanged at $7.20.
The context: Jarden analysts said that A2 Milk's dividend policy will likely be taken positively by investors, while the company's modest guidance upgrade is "mostly low quality" given the large contribution by its 75% owned dairy nutrition business Mataura Valley Milk. However, the update is positive given the ongoing weakness in China's end-market, they said.
Macquarie analysts said A2 Milk's dividend policy "signals confidence" in the company's ability to complete supply chain investment and maintain flexibility around growth and risk mitigation.
Bell Potter analyst Jonathan Snape noted that A2 Milk continues to trade at a premium to other dairy fast-moving consumer goods (FMCG) entities. He said the trading update illustrates an evolution of the company's revenue mix towards that of a more traditional dairy entity, that would likely step change as investment in downstream processing is pursued.
Wilsons Advisory analysts said the "marginally stronger result" is encouraging and reflects strong operational execution in a challenging market. They see the new dividend policy and openness to special dividends as positive, with A2 Milk rewarding shareholders whilst also implying improved visibility on supply chain transformation funding needs.
Morningstar analyst Angus Hewitt said that while the demographic challenges facing China are "well understood and aren't going away [...] fewer babies does not necessarily mean parents will spend less on them, provided parents can both afford to pay and continue to place high importance on the value of infant formula brands like A2."
"A2 shares lifted about 18% following the announcement, but we think the company still has more upside," Hewitt said.
The sources: Jarden research, Macquarie research, Bell Potter research, Wilsons Advisory research, Morningstar research
