A2 Milk shares soar to new record after jump in first-half profit

Wednesday 17th February 2016

A2 Milk shares soared to a record after the specialty milk marketer boosted first-half profit and raised its estimate for full-year earnings on a surge in demand for its infant formula in Australia, New Zealand, and China.

Profit jumped to $10.1 million in the six months ending Dec. 31, from $125,000 in the same period last year, the New Zealand-founded and Australian-based company said in a statement. The shares increased 26 percent to $2.55, after earlier touching a record $2.60.

Substantial growth in sales of A2 Platinum formula and a 5 percent rise in fresh milk sales in Australia, the category that launched the brand across the Tasman, boosted total revenue 86 percent to $139.1 million. Australia and New Zealand still dominate revenue at $127 million. Managing director Geoff Babidge said following a period of development A2 Platinum infant formula had become a significant contributor to growth and earnings, accounting for 53 percent of revenue now compared to just 47 percent in November.

“It's growing fast and we see that continuing," Babidge said. "In addition, we see positive prospects for growth of A2 Milk whole milk powder, which was first launched late last financial year."

A2 increased its guidance for full-year earnings, saying it now expects earnings before income, tax, depreciation, and amortisation of $45 million to $49 million, up $12 million on the previous outlook. It expects annual revenue of $335 million to $350 million, up $35 million from its previous forecast.

That’s despite the risk of regulatory changes in China where there is talk of infant formula manufacturers being limited to selling just three brands in market. Babidge said the company believes it’s well-positioned to meet any changes and the regulatory threat should be concluded within the next six to nine months.

In the first half, Ebitda rose 472 percent to $18.7 million, despite expensing establishment costs of $8.1 million in the US and UK markets.

The company reports both the US and UK revenue together, which showed it increased to $2.89 million in the first half compared to $892,000 the year prior.

The UK business is on track to achieve breakeven Ebit by year end, a quarter earlier than originally forecast, following a repositioning of its fresh milk offering into the premium specialty milk segment and distribution growing to around 1,200 stores. UHT long life milk was launched in September and infant formula is on trial.

In the US, A2 milk was extended from southern California into northern California in September despite the rate of growth in store numbers and sales being slower than forecast. Babidge said the fresh milk is now stocked in 85 percent of major retailers in California with Safeway-Albertsons selling it from this month, meaning it now has sufficient coverage to warrant kicking off mainstream consumer advertising with television commercials beginning this month. As a result, an additional US$3 million of costs has been earmarked for the next half above the previous spend in the US/UK markets.

Most of the infant formula sales have been through Australian grocery and pharmacy channels, with A2 Platinum the fastest-growing infant formula brand in Australia in the past year. Direct sales into China and sales through China-based e-commerce sites also had strong growth.

Babidge said the company experienced stock shortages in the first four months of the half but it has raised its production schedule with manufacturer Synlait Milk to meet increased demand and the company is building further A2 milk supply in New Zealand to meet expected demand in the 2017 financial year.

The company undertook an equity raising in October including a $40 million placement to institutional investors and a share purchase plan to raise a further $3 million, both of which were over-subscribed. Since dual listing on the ASX in March last year, the number of Australian investors has increased to more than 22,000 holding 64 percent of the shares on issue.

A2 said it won’t be paying a dividend as it continues to invest in international expansion and broadening its portfolio.

Simpson Grierson partner Peter Hinton, who has provided legal advice to the company for some years, has been appointed to the board as a non-executive independent director. The board is still looking to appoint another director with international skills some time this year.

The company successfully settled an action against the Australian Broadcasting Corporation in November.

BusinessDesk.co.nz

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