Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Morningstar upgrades a2 Milk despite challenges
Morningstar’s Australian and New Zealand stock analysts have upgraded a2 Milk, a New Zealand-based ASX-listed dairy success story of recent years, to a five-star rating. A dip in price over the past month has made the stock a better buy.
a2 Milk has both a geopolitical and a corporate political challenge to weather at the moment, putting it in the news for the wrong reasons.
The geopolitical one, out of the company’s hands, is the apparent escalation in import tariffs by China targetting selected Australian industries. About 80 per cent of a2’s earnings are derived from infant formula exports to China, Morningstar estimates. But, so far so good for dairy products and New Zealand.
“We expect the firm’s market share to climb to about 16 per cent by fiscal 2030 from more than 6 per cent in fiscal 2019, although competition, increased marketing needs, and channel gyrations related to COVID-19 present near-term risks,” the Morningstar report says.
The report, written by Adam Fleck, director of equity research for ANZ, also says the company has market share opportunities for fresh milk sales in North America and other global dairy products.
This supports Morningstar’s outlook for the company of 12 per cent in annual per-share earnings growth over the next decade.
“And with minimal capital investment needs a2 is set to enjoy stellar returns on invested capital and strong free cash flow,” Fleck says. “We think the firm has carved out a narrow economic moat, owing to its brand intangible assets.”
The local political challenge lies mainly with the company’s chairman, David Hearn, who took issue with what he believed were disparaging remarks made by Jayne Hrdlicka, a former chief executive, in a profile published in Fairfax’s ‘Good Weekend’ magazine in March. She had defended her spending on consultants Bain & Co, her previous employer, and was quoted as saying that a2 had no IT people when she joined.
More interestingly for the readers, she also said that she had left the company because her husband had contracted cancer, whereas there had been a lot of speculation at the time about whether she had been asked to leave because of a rift with the board. This speculation was not doused by the board at the time and subsequently fanned in the subsequent war of words between Hearn and Hrdlicka.
Hearn sent a letter to her saying she was in breach of her separation agreement after leaving a2 in December 2019. He’s asked for three “corrections” to the report and when she did not oblige, sent a letter to Fairfax.
According to the Fairfax’s ‘Australian Financial Review’, in a separate report, Hrdlicka accused London-based Hearn of “sending an email full of confidential and private correspondence to the media to inflict maximum personal damage upon her”.
Hrdlicka, now the chief executive of Virgin Australia, said in the original profile piece that a2 had not handled her departure very well.
The five-star rating was announced this week (March 29) after the stock had drifted lower to $7.94 a share. It subsequently slipped further to $7.81 the following day. This compares with $8.76 at the time the stock was last assessed, as four stars, on February 25. The stock’s 12-month peak was $12.64 at the end of December.
The maintained four-star rating in February was despite an earnings downgrade in February which “left a sour taste” but did not spoil the long-term outlook, leaving the shares as “attractive”.
