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A2 Milk shares jumped 14% on improved guidance

Wednesday 15th June 2016

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A2 Milk shares rose 14 percent after the milk marketing company raised its full-year guidance and said it is well placed to cope with changes to infant formula regulations in China

Revenue is now forecast to be in a range of $350 million to $360 million in the year ending June 30, from a previous forecast of $335 million to $350 million, the company said today. Operating earnings before interest, tax, depreciation and amortisation are projected to be $52 million to $54 million, up from the $45 million-to-$49 million range it gave with its first-half results in February.

Shares in A2 Milk hit a record high of $2.61 in trading on Feb. 17 but have since fallen back on worries about Chinese regulations. They reached $1.79 today, having soared 152 percent in the past 12 months.

Michael De Cesare, an analyst at Nikko Asset Management New Zealand, said investor concerns about the regulatory regime in China had weighed on the stock. "The market as a whole has been struggling with what seems to be a great long-term story caveated with quite complex and ever-changing regulation coming out of China in terms of food standard specifications and how that might impact on Australasian exporters of infant formula."

In its statement, A2 said it was "well placed to cope with changes to infant formula regulations in China announced in recent months including taxation of cross-border e-commerce (CBEC) traded commodities, publication of product lists for CBEC traded commodities through China free-trade zones and an infant formula registration rule for domestic and imported infant formula products in China."

De Cesare said A2 is well placed to benefit from the increased Chinese scrutiny of the infant formula market. "Companies with a quality product are going to benefit the most from the tightening up of this market, it will be the periphery, the lower-quality companies who will no longer be invited to the party."

A2 is due to join the S&P/ASX 200 Index at the close of trading on June 17 after a successful listing in Australia. De Cesare says the share register of A2 has broadened considerably in the last year and the inclusion in the ASX 200 will attract funds from around the world “When you combine the ASX listing which makes it investable for Australian funds and the second tick, with the inclusion in the ASX 200, that’s the cherry on the cake, now they’re in the flagship benchmark you get increasing interest from offshore, from North America, from the UK.”

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