A2 Milk result: Poised for first-half profit lift, coronavirus clouds outlook

a2 Milk chief executive Geoff Babidge. Photo / NZ Herald.

A2 Milk is expected to deliver a big lift in its first half earnings this week, but the coronavirus outbreak is clouding the infant formula company's outlook for the second half.

The onset of COVID-19, which Chinese President Xi Jinping has described as the "largest public health emergency" since the founding of communist China, has claimed 2444 lives in the PRC so far, but the likely impact on the infant formula sector there is not yet clear.

Early in December, when a2 Milk announced the surprise departure of chief executive and managing director Jayne Hrdlicka, the company reaffirmed its earnings guidance.

Last week, the company was also quick to state that its performance was on track despite key supplier, Synlait Milk - part owned by a2 Milk - downgrading its own earnings forecast.

A2 Milk has said it anticipates continued strong revenue growth for the year across all its key regions.

For the second half to December 31, a2 Milk has said it expects to report revenue in a range of $780 million to $800 million.

A2 Milk expects its EBITDA margin to be in a range of 31-32 per cent for the half year and 29-30 per cent for the full year.

Market expectations are for first half revenue to come in near the top of the range at $793 million, up from $613.1m in the previous corresponding period.

Analysts expect operating earnings, or EBITDA, of around $247m, up from $218.4m a year earlier.

"I would expect them to be reasonably close to their guidance, but the key points we will be looking for will be any market share updates," Oyvinn Rimer, senior research analyst at Harbour Asset Management, said.

Rimer said it appeared the company's had done "quite well" in China over the last three or four months.

Pricing data in China also looked quite strong, he said.

"It looks like there will be an increase in pricing for their product in China for the last month to six weeks, so that could perhaps shape the outlook statements that they could give," he said.

The flipside was coronavirus.

a2 Milk is expected to deliver a big lift in its first half earnings this week. Photo / File

"Hypothetically it could go either way. Consumption could perhaps go backward, but it's equally likely that foreign market product from a world class facility like Synlait - on top of a2 being a licensed product - could go in its favour.

"It could be one of those 'go to' products at this stressful time," Rimer said.

Harbour Asset Management has a stake in a2 Milk.

Exporters have struck problems getting their products distributed throughout China due to prolonged Chinese New Year break.

A2 Milk has the state-owned enterprise, China State Farms, as its sole import agent in China.

In the big picture, infant formula makers in China face the challenge of a declining birth rate, but a2 Milk has succeeded in the "stage four" segment - which is aimed at children aged between 3 and 6.

At its last annual meeting, the company said it had seen growth outside the China's major tier one and tier two cities.

After last year's disruption at the executive level, investors have taken some comfort that the a2 Milk veteran, Geoff Babidge, has taken up the role again while a replacement for Hrdlicka is found.

The company said that Susan Massasso, a key player in top management who last year said she would resign as chief marketing officer, had been appointed to the newly created role of chief growth and brand officer.

"We are pleased she will be remaining with the company in such an important and expanded role," the company said.

A2 Milk's share price is typically volatile, trading today at $15.65, down 73c or 4.4 per cent, as the sharemarket fell sharply in response to the fallout from the coronavirus outbreak.