Stock in Focus: A2 Milk (ATM.NZX/A2M.ASX)
A2 Milk shares sank -7.3% after delivering their 2023 half year result. Despite delivering modest top line growth, the market had optimistic expectations on the back of China reopening with investors disappointed by both the result and guidance. Total revenue rose +19%, whilst operating earnings were up only +11% to $108m as margins tightened and higher operating costs weighed. US liquid milk managed to cut its losses, nearing breakeven, while A2’s China label experienced growth on the back of heightened marketing spend to offset market wide decline of -11% due to the lower birthrate in China.
While showing signs of improvement, the low level of growth and weakening margins is not enough to excite us to change our recommendation. We believe there is still a lot of work and challenges ahead to justify A2’s current share price in our opinion, and for that reason we are still Hold rated. A2 Milk is currently priced at ~34x forward earnings with the stock optimistically priced in our opinion, and slightly ahead of its 5-year average, but without the explosive growth outlook it experienced pre-Covid.
New Zealand Market Movers
The New Zealand Market (NZX50 Index -2.1%) fell on the start of one of the busiest weeks for local the local market.
Scales rose +3.5%, after the company provided another vague update regarding Cyclone Gabrielle with wide-ranging impacts. Of its 15 orchards three have extensive damage and one has sustained moderate damage. The news was taken as better-than-expected. Scales are due to report this Thursday and will provide more light on the situation. They stated they do not have crop insurance. We’re expecting a ~$40m hit on revenue (25% of Mr. Apple Crop volumes impacted) and a +$40M cost of redevelopment. Retain buy-rating but wait for full report next week.
Cyclone Gabrielle damage is expected to reach $8B, with the majority to be covered by insurance companies while the government tapping in emergency funding to spur recovery efforts – however the injection of cash effectively equates to QE, which could drive sticky inflation even further, making RBNZ’s job a little harder to tame inflation.
Ryman Healthcare fell -4.6% as it opened for trade following the capital, dragging retirement peers Oceania and Summerset – both falling -2.4%. We remain buy-rated on Oceania and Summerset; neutral on Ryman.
Pushpay shares fell 3.1% after ACC which owns a 6.2%, stated they will dismiss the board’s recommendation and vote against the $1.34 takeover bid undervalues Pushpay and the offer is only “within” the Independ Advisor’s valuation range. Our gut feel is that the takeover will most likely go through as ACC’s 6.2% ownership is minor and will not sway other investors. Remain hold rated – not enough value at $1.26 per share.
Auckland International Airport released its monthly traffic update, with total passengers in January at 73% of the 2019 pre-COVID equivalent. International passengers (excl. transits) were 69% of the pre-COVID equivalent with transit passengers and domestic passengers at 58% and 81% respectively – showing strong recovery, but still more room to reach peak pre-Covid levels. Retain neutral – prefer Infratil for infrastructure.
Australia Market Movers
The Australian market (ASX200 Index, +0.1%) edged higher on a mixed day of trade, which saw most sectors trade lower with financials doing the major lifting, whilst energy and real estate lead losses.
Insurer NIB Holdings slumped -11% on its earnings as another insurer struggles. Ampol shares rose +1.7% after reporting record earnings of $1.32B helped by elevated fuel prices improving margins beating their last record earnings in 2015.
Ooh! media shares rose 4% as their post-Covid recovery impressed investors, when the advertiser lifted revenue by +18%to $592m and operating earnings (EBITDA) rose +64% to $127.1m.
US Market Movers
US markets were closed for Presidents’ Day. Little newsflow out of the US, but a chart of interest — US strategic petroleum reserves at their lowest since ‘82. In ‘82 oil traded (inflation-adjusted) for ~$94 a barrel. It might not be so crazy to expect the same in ‘23. Will we see $100/barrel oil in 2023? History doesn’t repeat – but it rhymes. And in spite of the electric car boom we’re still very much reliant on oil.
What Markets will be watching this week
Monday
A2 Milk Earnings
Freightways Earnings
oOh! Media Earnings
Tuesday
BHP Earnings
Coles Earnings
Costa Group Earnings
Mercury Energy Earnings
PGG Wrightson Earnings
Wednesday
RBNZ OCR decision
Rio Tinto Earnings
WiseTech Global Earnings
EBOS Group Earnings
Spark Earnings
Thursday
Next DC Earnings
Qantas Earnings
TPG Telecom Earnings
Auckland International Airport Earnings
Air NZ Earnings
Heartland Group Earnings
Precinct Properties Earnings
Scales Earnings
Sky TV Earnings
Tourism Holdings Earnings
Friday
Lynas Rare Earths Earnings
Harvey Norman Earnings
Channel Infrastructure Earnings
Delegat Group Earnings
Summerset Group Earnings
