On Tuesday, Citi reaffirmed its Buy rating and a price target of NZD7.04 for a2 Milk Co (A2M:AU) (OTC: ACOPF) stock, as the company prepares for an upcoming acquisition. The financial firm anticipates that once the acquisition is publicized next week, discussions among investors will pivot towards a2 Milk's capital management strategies. This includes expectations for the company's first dividend or a share buyback, with a consensus predicting the first dividend to be 16 cents per share in FY26.
The acquisition is anticipated to cost "hundreds of millions," which is notably higher than the $100 million to $200 million initially estimated for a greenfield facility. However, the advantage of acquiring a brownfield facility lies in the quicker access to China registrations, which is a key market for a2 Milk. Despite the higher cost of acquisition, Citi notes that a2 Milk concluded FY24 with a robust balance sheet, featuring $931 million in net cash.
Additionally, a2 Milk will be participating in Synlait's equity raise next week with an investment of approximately $33 million. The collaboration between a2 Milk and Synlait is expected to further strengthen a2 Milk's market position and financial stability.
Citi's stance remains positive on a2 Milk's prospects, as the analyst upholds the Buy recommendation. The anticipated acquisition and subsequent capital management initiatives are seen as significant steps in the company's strategic growth and shareholder value enhancement.
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