MM thoughts on A2 Milk (A2M) & EML Payments (EML)
Can you provide an update on a few of the stocks that have gone backwards recently, specifically A2 Milk and EML Payments?
Thanks Judy
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Answer
Hi Judy,
Firstly, in both cases we are looking to add to rather than cut positions.
A2 Milk (A2M) is a small position, 3% at purchase and now closer to 1.5% of the Flagship Growth portfolio. While the stock is clearly on the nose we think too much downside is now factored into the price. On an underlying basis, A2M is now trading on just 14x FY21 earnings dropping to 12x FY22 (based on UBS numbers). We’re also seeing some improvement in infant formula pricing in China which is a consequence of de-stocking. All in all, we think the risk reward is now on our side to add to the position.
EML Payments (EML) is held in the Emerging Companies Portfolios and fell ~50% this week, we’re now marginally down on this position having been up significantly. The issues relate to “significant regulatory concerns” with their European business called PFS Card Services. The Central Bank of Ireland saying that they have dropped the ball in terms of anti-money laundering and counter terrorism controls. A few potential outcomes that could play out here: 1. Worst case they lose their licence to operate which would cut earnings by around 45% in FY21 but nearer 30% in outer years. This is unlikely yet it seems the market has priced this in. 2. They close the specific part of the business that has issues taking about a 20% hit to earnings 3. They keep operating but with higher compliance costs, call it a 5% earnings hit.
So, uncertainly remains however on an ongoing basis it seems like something in the quantum of 30-35% worst case scenario and ~5% best base. The stock has dropped from $5.10 to ~$3.
