On Friday, Goldman Sachs (NYSE:GS) adjusted its outlook on China Mengniu Dairy Company Limited (2319:HK) (OTC: CIADY) shares, reducing the price target to HK$23.20 from the previous HK$24.10, while continuing to endorse the stock with a Buy rating. This change comes after Mengniu Dairy reported its first-half 2024 financial results earlier in the week, on August 28.
Mengniu Dairy's first-half financials showed a mixed performance, with sales reaching Rmb44.7 billion and net profit at Rmb2.4 billion. These figures represent a 12.6% increase in sales year over year but a 19.0% decrease in net profit.
Despite this, the operating profit margin (OPM) experienced a year-over-year improvement, climbing by 60 basis points to 7.0%, which is above the company's earlier guidance for the year.
Following a management meeting on Thursday, several key points were outlined. The company reaffirmed its full-year 2024 guidance, expecting an OPM expansion of 30-50 basis points.
Sales are also anticipated to sequentially improve. Looking further ahead, management emphasized a focus on profitability enhancement and cash flow generation.
This strategic shift comes in anticipation of industry-wide sales normalization, with mid-single to low-single-digit percentage growth expected over the next three years.
The supply situation for raw milk, which has been in oversupply, is projected to reach a balance by the third quarter of 2025. Additionally, the impairment of raw milk powder inventory is likely to peak in the second half of 2024. These supply adjustments are part of the broader strategic planning outlined by the company's management.
In a move that may appeal to investors, Mengniu Dairy announced plans for a HK$2 billion share buyback. Moreover, the company intends to increase its dividend payout ratio to gradually reach 50% within the next two years, up from 40% in 2023. This commitment to shareholder returns underscores the company's confidence in its financial strategy and future performance.
In other recent news, China Mengniu Dairy Company Limited has been downgraded by JPMorgan (NYSE:JPM) from Overweight to Neutral, citing rising costs and weak demand among the reasons.
The firm also substantially lowered the price target to HK$13.00 from the previous HK$30.00 due to concerns about the dairy company's current financial trajectory and market challenges.
Key issues leading to the downgrade include projected further declines in raw milk costs due to weakening demand, resulting in increased discounting and the provision of bulk milk powder. This is expected to negatively impact Mengniu Dairy's sales and margins.
A lack of new, strong products to drive sales was also cited as a concern, along with the company's relatively weaker execution flexibility in an economic downturn.
JPMorgan further highlighted the low probability of Mengniu Dairy increasing its dividend payout quickly from the current 40% to rival that of its competitor Yili, which stands at 73%. The firm projects a sales and earnings decline of 1.0% and 10.5%, respectively, for the year 2024.
The sales and earnings compound annual growth rate (CAGR) from 2024 to 2026 is estimated to be 3% and 8%, underperforming compared to Yili's projected growth. These recent developments contribute to the evolving financial landscape of Mengniu Dairy.
InvestingPro Insights
As China Mengniu Dairy Company Limited (OTC: CIADY) navigates through its strategic financial planning, real-time data and insights from InvestingPro can provide investors with a deeper understanding of the company's current market position. With a market capitalization of $6.69 billion and a P/E ratio of 11.15, Mengniu Dairy is trading at a lower earnings multiple than many of its peers, suggesting a potentially undervalued stock. This is further supported by an adjusted P/E ratio over the last twelve months as of Q2 2024 sitting at 10.98.
InvestingPro Tips highlight that Mengniu Dairy has seen a significant return over the last week, with a 7.99% price total return, indicating a recent uptick in investor confidence. Additionally, the company is recognized as a prominent player in the Food Products industry. With analysts predicting profitability for the year and the company's profitability over the last twelve months, these factors suggest a solid foundation for future growth.
For those interested in dividend potential, Mengniu Dairy's dividend yield stood at 3.68%, with a notable dividend growth of 19.6% over the last twelve months as of Q2 2024. This aligns with the company's announcement to increase its dividend payout ratio, reinforcing its commitment to shareholder returns. For further insights and additional InvestingPro Tips, investors can explore the full suite of metrics and expert analysis available at InvestingPro.
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