-Performance of higher-margin English label product key to FY22
-Significant downgrade to longer-term margin outlook
-Material expenditure on marketing now required by
While there was no substantial change to FY22 expectations at the company's investor briefing,
Macquarie points out the revenue target assumes
Still, Morgans believes the business is "through the worst of it" albeit earnings and regulatory uncertainty continues. All channels are running below the broker's expectations with the exception of the higher-margin English label product.
Pricing for English label has increased and further improvement is expected, and the performance of this higher-margin product will be a key determinant of the current year's performance.
What has not changed, Morgans asserts, is a strong brand that has significant opportunity to grow in
In terms of English label sales, Credit Suisse believes there is a reasonable case for a recovery, given cross-border channels and daigou were shut down because of the pandemic.
The broker had been concerned that English label had lost its market position to domestic brands at similar prices, yet the company has assured investors that English label will soon benefit from a brand upgrade and innovations.
The broker also ascertains a meaningful recovery can occur in both daigou and CBEC infant formula sales over the next three years as well as market share gains in
In
Meanwhile, product innovation has been relatively limited and the company is still testing the brand's ability to move into new categories. Yet the broker observes company's "health" credentials in
Despite the challenges of
Macquarie also acknowledges there are opportunities for
Value?
Credit Suisse upgrades to Neutral, noting the company is investing to recover lost English label sales and has gaps in its market share for
Jarden, not one of the seven stockbrokers monitored daily on the FNArena database, also upgrades to Neutral from Underweight with a target of NZ$6.60, on the back of evidence the business has retained its position in its key end market, China. The broker now envisages increased valuation support should offset the transition risk that exists in returning to growth.
US
Macquarie points to the loss of a club channel customer in the US, which has meant first quarter volumes were down, and notes the distribution cost pressures in this market. As a result the path to profitability the US is being deferred again with a target now of FY25-26.
Based on expected revenue growth of
Margins
As the company has set its target margins in the "teens" based on anticipated conditions and possibly the "low-to-mid twenties" longer term, Macquarie is hopeful this is the final material downgrade.
Nevertheless, the broker believes there is significant risk and uncertainty around a resumption of growth. The margin outlook is materially below consensus which had margin estimates of around 25% for the medium to longer term and a pre-pandemic outlook for 30% in operating earnings (EBITDA) margins.
Another dampener is the outlook for the Mataura Valley Milk business, with profitability now expected in FY26 rather than FY25 as previously disclosed.
Credit Suisse is now modelling
Morgans believes over the medium to longer term margins in the low to mid-20% region are possible if English label sales recover well. The company's margin peaked at 32.3% in FY19 yet the business has now changed amid a declining birth rate in
The company needs now to increase marketing expenditure having previously relied on daigou and the underspend by competitors, the broker asserts. In addition, there are the losses of Mataura Valley Milk to contend with and the broker considers the valuation "full", downgrading to Hold from Add.
FY22
On a qualitative basis the company indicated English label sales will be weaker in the first half comparatively, albeit running ahead of expectations. On the positive side,
Australasian fresh milk sales were lower than Morgans expected in the quarter, largely stemming from adverse FX rates. The broker notes the company's trading update was noticeably weaker than peers.
US milk sales were lower mid distribution cost pressure and Mataura Valley Milk nutritional demand was weaker too, following a decline in third party volumes. As a result first half net profit is likely to be materially lower while the second half should be higher on a comparable basis, Morgans suggests.
The database has two Buy ratings, two Hold and one Sell (Macquarie). The consensus target is
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