-Market share gains likely to be sticky
-Higher margin and currency benefits in FY20
-Is the stock fully priced?
Strong revenue in infant formula in
The company has benefited from foreign brands winning back share in
Macquarie suspects customer acquisition and market share gains may be sticky and quality imported products are likely to be favoured. Citi also points out, along with market share gains, there is a potential for a second spike in COVID-19 cases that may drive more stockpiling.
However, should customer stockpiling turn out to be a headwind in FY21, then
Morgans asserts the company would be one of the few that has been a beneficiary of the pandemic and its restrictions, having upgraded FY20 earnings guidance. Revenue guidance is for NZ$1.7-75bn and operating earnings (EBITDA) margins of 31-32%. Guidance also assumes the planned marketing investment of NZ$200m will be spent entirely in FY20.
Revenue growth has been across all regions, in particular infant nutrition sold in
Benefits have accrued from higher gross margin nutritional products and favourable FX as well as lower costs, however the company asserts these factors are not sustainable, reiterating a target margin of around 30% for the medium term.
Citi considers FY20 margin guidance conservative, as this assumes the entire marketing budget will be spent in that year. This could be difficult, given the challenges in obtaining returns from marketing campaigns amid social distancing measures, and better sales arguably reduce the need for more marketing.
Valuation Support?
Macquarie also suspects, while the upgrade was solid, a muted share price reaction could reflect existing expectations of positive trading as well as the belief that the benefits may be one-off.
Wilsons, not one of the seven, continues to like the brand but believes the valuation gap has now closed and reduces its rating to Market Weight from Overweight, with a target of
Outlook
Beyond FY21 Wilsons continues to expect sales growth will be driven by
Morgans raises forecasts to the top end of guidance and ascertains there is potential upside risk if elevated demand continues and some operating expenditure is deferred into FY21.
Still, the broker warns that peers such as
Credit Suisse also struggles to find sufficient valuation support and considers a2 category competition and price convergence key emerging risks. On the company's side, it has brand strength, a tailored proposition in
While the addressable market, particularly in
FNArena's database has three Buy ratings, two Hold and two Sell. The consensus target is
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