A2 Reiterates Slowing Near-Term Growth at AGM, but Better Days Ahead; Shares Slightly Undervalued

Narrow-moat a2 Milk remains on track to match our near-term forecasts, and we maintain our NZD 16.30 (AUD 15.20) fair value estimate. At the company’s annual general meeting, management reiterated its full-year 2021 outlook for revenue of NZD 1.8 billion to NZD 1.9 billion and EBITDA margin of about 31%, tracking our estimates. This suggests top-line growth slowing to about 5% to 10% versus 33% in fiscal 2020, owing to pantry destocking after the strong pulled-forward demand in the early part of the COVID-19 pandemic, and disruption to the corporate daigou channel during recent lockdowns in Melbourne, Australia, which has driven down orders for infant formula that otherwise would have gone to China. Management noted some uncertainty to this forecast due to COVID-19 volatility, but as we outlined in our note “A2 Milk Not Immune to Coronavirus, but Long-Term Health Remains; NZD 16.30 FVE Maintained” from Sept. 28, 2020, we view these issues as temporary. We anticipate revenue growth rebounding to double-digit annual gains in the four years from fiscal 2022 through 2025, alongside EBITDA margins increasing to about 32%.