We initiate coverage of a2 Milk with an Underweight rating and $8.00 target price. a2 Milk has shown a strong recovery in sales and profit margins following COVID-19 disruptions. The prospect for growth remains good over the next three years but it will increasingly be focused on China label infant formula, despite a soft industry backdrop. a2 Milk’s acquisition of the Pokeno facility and divestment of Mataura Valley Milk (MVM) will boost EBITDA margins with a 220bp uptick from the divestment of MVM and a further 130bp through the internalisation of production at Pokeno. We see EBITDA margins reaching 20% by FY30e. a2 Milk has good growth prospects, but the growth is narrowly focused on China infant formula sales, which has some risk.

Treasury Wines FY25 result highlighted the divergent performance across its divisions. Penfolds had 17% EBITS growth and still has a good runway for growth, while the Americas was carried by DAOU acquisition synergies. Americas underlying EBITS and Treasury Premium Brands both declined. The company clearly believes its shares are under-valued with a $200 million buyback confirmed. The more interesting debate that could build is whether Treasury will consider a break-up. We value Penfolds at $7.52 per share, providing an underpinning for valuation.

Ampol has announced the proposed acquisition of the 500-store EG petrol station network. The acquisition price of $1,050 million is at an EV/EBIT of 24.8x pre synergies, or 9.1x post synergies (pre AASB-16), which highlights the importance of the synergies in this deal. Given Ampol’s existing supply to EG and ability to accelerate the rollout of U-Go un-manned stations, the synergies look plausible. We lift our target price from $28.50 to $30.00 to reflect the EG deal noting that it could be 5%-6% EPS accretive by FY29e. The key unknown is ACCC approval.

JB Hi-Fi reported FY25 EBIT of $708 million, excluding significant items. Operating profit growth of 9% was solid and largely reflected good sales trends in the year. While the housing cycle may improve, the more important driver of its sales outlook is price inflation, which is falling away. We expect sales growth of 3%-4% for JB Hi-Fi Australia and The Good Guys. The EBIT margin profile is likely steady going forward because a higher portion of sales growth will come from low margin businesses and wage and rent cost growth will remain elevated.

Nick Scali delivered EBIT of $106 million, down 18%. Gross margins in ANZ were down 100bp but remain elevated on history at 65%. The UK losses at $9.6 million exceeded expectations, with losses guided to continue. Our EPS revisions are a downgrade of 1.6% to FY26e but upgrades of 2.5% and 1.5% to FY27e and FY28e. A large sales uplift is required to break even in the UK, with current conditions supportive domestically. Nick Scali will have to deliver on the UK and on growth in the domestic market.

Endeavour Group’s announcement that Executive Chairman, Ari Mervis, will step down naturally raises many questions. However, one question it helps answer is that near-term sales and earnings look like they are stabilising. The teleconference call made it clear that the strategy “refresh” is just the beginning. As a result, there could still be substantial change in Endeavour and earnings risk under new CEO Jayne Hrdlicka who starts in January 2026.

Domino’s recently announced that its relatively new CEO Mark Van Dyck would step down. While the Board is supportive of his strategic plan, it wanted faster progress. The limited detail we have on its strategy shows a focus on improved profit margins more so than store growth. We expect limited sales growth and margin recovery will only be evident in 2026 onwards.

We initiate coverage on dusk, an Australian specialty retailer of Home Fragrance Products, offering a range of dusk branded products at competitive prices from its physical stores and online store. We see dusk pushing plans to improve sales productivity through new product development, category expansion, increasing the release rate of new product and the opening of more metro stores. 

The more alarming features of Bapcor’s trading update are the rapid deterioration in sales and immediate departure of three board members. While somewhat “glass half-full” we interpret the FY25e trading update as more a “clean out” of the financials and a reset. Management targets over FY25e to FY30e will be easier to achieve.

The Australian consumer sector is likely to report a wide divergence in fortunes this reporting season. Even though sales trends are improving, operating cost growth is elevated and gross margin gains are fading. The companies with the best earnings growth for FY25e are likely to be Breville, GyG, Harvey Norman, Lovisa, Sigma and Treasury Wines. For most of these, consensus expectations are already high and commentary on current trading and costs will influence share prices. At the other end, retailers with double-digit declines in earnings are Endeavour, Myer, Nick Scali and Woolworths.