Citi analyst backs A2 Milk’s APAC boss Peter Nathan to be next CEO

A2 Milk is currently running an extensive search for its next CEO but it could already have the ideal candidate.

The company lost about $4.5bn from its market capitalisation last year after Ms Hrdlicka warned in August an increase in marketing would result in earnings before interest, taxes, depreciation and amortisation margins falling from 31.7 per cent to about 28 per cent. Picture: Stuart McEvoy/The Australian.

Citi analyst Sam Teeger has thrown his support behind A2 Milk’s Asia Pacific boss, Peter Nathan, becoming the next chief executive of the market darling.

A2 is currently searching, internally and externally, for its next chief executive after Jayne Hrdlicka stepped down last December, triggering the recall of her predecessor Geoff Babidge to serve in an interim capacity.

The Australian revealed earlier this month that A2 investors had put forward Mr Nathan, who has been at the company since 2008, as a potential candidate.

Mr Teeger also shares that view, further adding to speculation that Mr Nathan may be tapped to lead the company.

“While the CEO search has been both an internal and external process, we view ANZ CEO Peter Nathan as a natural candidate, given his known qualities and absence of cultural risk,” Mr Teeger wrote in a note to investors.

His note comes three weeks after Andrew Mitchell, director at A2 investor Ophir Asset Management, said Mr Nathan was a “first-rate corporate executive”.

“He should receive much of the kudos for managing the highly complex and multiple channels to market for the business,” Mr Mitchell said. “He clearly understands the Asia-Pac market well, having very successfully worked in the region for A2 Milk for over a decade.

Mr Teeger estimated A2 will finish the year with about $840m net cash, which he said was “ample for a potential acquisition to build its manufacturing capabilities”. The company has been mulling for some time switching from being a solely a brand owner to also a manufacturer, and Mr Babidge confirmed in February it would most likely look at “partnering with others” to invest in its own processing capacity.

“A2 is well placed to deliver a strong (second half) performance, as it indirectly benefits from coronavirus related impacts, including Chinese consumers stockpiling essential items such as infant formula,” Mr Teeger said.

The company lost about $4.5bn from its market capitalisation last year after Ms Hrdlicka warned in August an increase in marketing would result in earnings before interest, taxes, depreciation and amortisation margins falling from 31.7 per cent to about 28 per cent.

The comments spooked investors, sending A2’s shares from around $17 in August to a low of $11.31 in November.

Despite the challenges faced during the COVID-19 pandemic, including travel restrictions and border closures, Mr Babidge and Mr Nathan have managed to claw back the share losses and add almost another $1.1bn to its market capitalisation.

The company’s shares have surged from $13.97 to a high of $19.90 last week since Mr Babidge returned to A2.

Earlier this year Mr Babidge revealed an EBITDA margin of 32.6 per cent for the six months to December 31, which he said was better than expected. But Mr Teeger said the margin might be slightly more than that.

‘We see upside to FY20e margin guidance of 31 to 32 per cent (Citi estimates 33 per cent), as budgeted marketing spend may get deferred given it is unlikely to be effectively spent as consumers increasingly stay home, and consultant and travel costs come down.”