FIRST CUT: A2 Milk doubles profit in 2018 on strong formula sales

Wednesday 22nd August 2018

A2 Milk Co more than doubled its 2018 profit as it lifted its margins on increased infant formula sales.

Net profit rose to $195.7 million in the year ended June 30, from $90.6 million a year earlier, on a 68 percent lift in revenue to $922.7 million. Earnings before interest, tax, deprecation and amortisation also more than doubled to $283 million. The company 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.

A2's shares have soared since 2017 as it made gains from strong demand for infant formula, particularly in China. In the latest year, its a2 platinum formula sales revenue was $724.2 million, up 84 percent on 2017.

Looking ahead, a2 said it "anticipates further growth in revenue particularly in respect of nutritional products" in Australia, New Zealand and China, and liquid milk in the United States. 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.

A2 disappointed investors with its May forecast when it 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, reflecting higher formula sales and favourable currency movements.

"The focus on growth initiatives in targeted emerging markets and new product development will continue," a2 said. "Marketing expenditure as a percentage of sales is expected to be higher than FY18 given continued investment in the Australian market, re-phasing of 2H18 activities in China, and appropriate investment to support US market expansion. Overhead costs are also expected to be higher than FY18, primarily due to increasing headcount for China and the corporate office to support continued growth and organisational development."

This year, a2 Milk shares have gained 38 percent, the second-best performance on the S&P/NZX 50 Index which has risen 8.6 percent in that time. They closed yesterday at $11.13.

(BusinessDesk)

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