a2 Milk Co Ltd (A2M) has surged since mid-January, helped by a solid 1st half, which beat consensus estimates, and saw first-half profits jump +16%, e.g. revenue grew 3.7% to $NZ812m while profit of $NZ85.3m was a 15% beat to expectations. The company’s performance in the US and China was better than expected, allowing it to upgrade FY24 guidance from low single-digit revenue growth to low to mid-single-digit growth. The stock saw many broker moves following the result, with most lifting their target to the $5.5-$6 area; the stock has already arrived at the station after its ~50% rally. Interestingly, over 6% of A2M is held short, which we believe will support the stock into pullbacks this FY.
A2Ms management warned that China’s infant formula market remains challenging, with a double-digit decline in market value still expected in FY24. However, the company is well positioned, with a cash balance of NZ$792.1 million, to seek out growth opportunities, not a stock to be short, in our opinion.
- We can see A2M testing ~$7 this FY, making it an attractive risk/reward buy into dips towards $5.50.
MM is cautiously bullish toward A2M ~$6
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