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A2 Milk shares rise 4.4% as company doubles down on US, Asia

Wednesday 22nd August 2018

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A2 Milk's shares rose 4.4 percent following the milk marketer's annual results this morning, but are still well off record highs seen earlier this year.

The company more than doubled net profit to $195.7 million in the June 2018 year, as it widened margins and increased infant formula sales. Revenue rose 68 percent to $922.7 million and earnings before interest, tax, deprecation and amortisation also more than doubled to $283 million. A2 already gave that revenue figure last month, just beating its $900 million-to-$920 million forecast from May, and at the time said ebitda was about 30 percent of sales, implying a figure around $277 million. 

The shares have soared since 2017 as it benefited from strong demand for infant formula, particularly in China. In the latest year, a2's formula sales revenue was $724.2 million, up 84 percent on 2017. 

This year, the stock has gained a more modest 38 percent, though still the second-best performance on the S&P/NZX 50 Index which has risen 8.6 percent in that time. Recently they traded up 4.4 percent to $11.62.

A2 shares hit a record $14.10 in March before the company disappointed investors with a forecast which said first-half gross margin of 49.8 percent was likely to carry through into the second half as expansion plans in the US and China led to higher marketing costs. Today, it said gross margin was 50.3 percent over the year, reflecting higher formula sales and favourable currency movements.

Michael Milne, an investment adviser at Craigs Investment Partners, said the headline result "was slightly ahead of expectations - 'slightly' being the key word."

"Some of it they'd guided to earlier in that trading update in July. Overall it was another strong result, the ebitda was slightly ahead of consensus and lower marketing spend helped some of those figures," Milne said. 

"It's bounced around a bit in the past few months, it has dropped back a bit from those $14 highs but this result is a good, solid result and that's why we've seen a bit of recovery over the last couple of weeks."

A2 has been extending and widening relationships with suppliers and distributors as it develops its supply chain and enters new markets. In its first-half results announcement in February, a2 announced a strategic partnership with Fonterra Cooperative Group, the world's biggest dairy exporter, and in April it signed an exclusive distribution deal with Yuhan Corp in South Korea. 

In July, it extended its infant formula supply deal with New Zealand dairy processor Synlait Milk until at least July 2023; this month, it extended its deal to sell infant formula to China, via China State Farm, for a further three years to 2021. In the year, a2 also launched sales of infant formula in Hong Kong for the first time, began selling fresh milk in Singapore, and tested selling whole-milk powder in Vietnam.

"The focus on growth initiatives in targeted emerging markets will continue, building on the company’s established strategic partnerships," a2 said.

While Australia and New Zealand remain its biggest market - with revenue of $656.6 million and ebitda of $262.2 million in 2018 - it's seeing greater growth in its China and other Asia segment, where revenue more than doubled to $233.6 million and ebitda was up 148 percent to $81.3 million in the latest year.

The United States, where the company sells four varieties of fresh milk, and the United Kingdom combined to deliver $32.4 million in sales and an ebitda-loss of $27.6 million in the latest year. In its annual report, a2 says it's still positive about the US market and plans to invest US$22 million in 2019, mostly on marketing, and hopes for positive monthly ebitda within three years. 

However, it's less bullish about the UK, which it says "continues to be a challenging market to achieve scale" despite fresh milk sales up 50 percent from the previous year. It's changing suppliers for fresh milk early in the current financial year, which it doesn't anticipate will disrupt sales or stock availability.

The company's general outlook was positive, with a2 saying it "anticipates further growth in revenue particularly in respect of nutritional products" in Australia, New Zealand and China, and liquid milk in the US. It expects its ebitda-to-sales ratio to be broadly consistent with 2018's 31 percent, which was up from 26 percent in 2017, and said the board is continuing to look at how it uses its capital, including reviewing investment opportunities for blending and canning. 

(BusinessDesk)

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