-Marketing, investment and costs likely weighted to the second half
-Strong growth expected despite challenging trading conditions
-Re-negotiated supply contract with
Broker opinions differ widely on the near-term outlook for
There are also ongoing challenges in the channel mix and rising competition in the Chinese market for infant formula. Breaking even in the US liquid milk category is also expected to be long-dated. As the stock offers limited valuation support, the broker retains a Lighten rating.
The company recognises further growth in the Chinese market requires success in cross-border e-commerce and mother & baby stores, along with other bricks & mortar channels. Yet
Morgans agrees the margin will still decline relative to FY19 as the company moves into an investment phase. Revenue growth will now come at a much higher cost than in the past given
Still, the broker considers the forecast for strong growth a credible outcome, in the light of peer results that highlight the challenging trading conditions, increased competition and regulatory changes. Declining birth rates in
Margins
FY20 margin guidance has been upgraded to 29-30% while the company has guided to a first half margin of 31-32%. The reason for this is that marketing, investment and costs are likely to be weighted to the second half.
The fact that gross margin drove the upgrade to the overall outlook is positive,
The main issue the company faces is about what is a realistic long-term share of the Chinese infant formula market and what level of profitability can be achieved.
Citi reiterates a Sell case, although acknowledges momentum appears strong. The broker believes margin expectations from FY21 do not reflect the impact of increased investment and are too optimistic. Competition is also heightened, as multiple operators enter the segment, although this will take time to play out as switching is not significant at present.
Morgan Stanley agrees, assessing the majority of the margin upgrade can be attributed to price/channel mix benefits and an earlier forecast that was conservative. Management has indicated that store velocity drove the majority of growth in
CLSA, not one of the seven stockbrokers monitored daily on the FNArena database, downgrades to Sell from Underperform. The broker implies, from the update, that the second half operating earnings margin will fall to around 28%. The issue is whether this is a reliable gauge for FY21 margins. While some recovery is expected it is not enough to turn CLSA bullish and a target of
Wilsons, not one of the seven, takes a different view and upgrades to Overweight, believing the current share price represents an attractive entry point, retaining a target of
Wilsons had been uncertain about this aspect, as well as regarding returns from increased marketing expenditure, but now believes the renegotiated supply contract with
There was no reference to the 12% marketing-to-sales ratio which could otherwise be used to anchor revenue. Still, Macquarie assesses the size of price increases taken in FY20 reflect confidence in the outlook for demand.
FNArena's database has two Buy ratings, two Hold and three Sell. The consensus target is
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