A2 Milk shares rise after strong growth

Xu Jun, Chairman China State Farms Holdings Shanghai (distributor of A2 milk products in China) and Geoff Babidge Chief Executive Officer of A2 Corporation. Photo / Supplied

A2 Milk Co shares rose almost 5 per cent after the company updated shareholders at its annual meeting in Sydney, with the chief executive saying the board wanted to be clear about its performance.

In the four months to October, revenue was at $155.2 million, compared to $79.3 million in the same period of the 2016 financial year, which A2 said reflected continued growth in infant formula and milk products in its presentation posted to the NZX.

Earlier this month, the Auckland-based, Sydney-headquartered company reported revenue of $112.5 million in the three months ended Sept. 30, with sales of fresh milk in Australia and New Zealand up 7 per cent from a year earlier. Then, chief executive Geoffrey Babidge said there had been "continued and consistent growth" in consumer demand for its A2 Platinum infant formula, despite research reports suggesting demand would be volatile.

"Clearly, our infant formula business in Australia and China is performing strongly," chief executive Geoffrey Babidge told BusinessDesk. "Part of the reason the board made the call is to ensure the market is fully informed that our company is performing very credibly in respect of its infant formula business, whereas there has been some chatter in the marketplace in respect of how some other companies have been faring in this space."

Earnings before interest, tax, depreciation and amortisation was $35.5 million in the four months to October, from $6.2 million in the prior comparable period, while net profit was $22 million, from $3.2 million a year earlier. In the four months, the EBITDA/sales ratio increased to 22.9 per cent, A2 said.

The board expects to adopt a dividend policy after the financial year is finished, "assuming continuing strong positive operating cash flow and in the absence of new significant capital demands."

Chairman David Hearn said the dividend signalled the business was maturing into the next phase of being a more established and larger business.

"We were consciously using our free cash to drive growth. That phase has been very successful, and we've now got a high growth business throwing off a lot of cash," Hearn said. "It's a sign the company is moving on and developing, not just paying a dividend."

China is half the world's infant formula market, and A2 is just scratching the surface, Hearn said.

"Despite the fact, we've got very significant growth - it may be not at this level, but we don't see any reason to suspect growth won't be a very big component going forward."

The revenue reflects a significant seasonal build for the company's key online sales event in China on Nov. 11, known as 'Single's Day', the company said. Its volume of sales on that day more than doubled from the previous year across four e-commerce platforms, with its Stage 3 infant formula in the top 10 products across all categories on one platform, JD.com.

A2 Platinum held about 8.5 per cent of the Alibaba Tmall/Taobao e-commerce platform as of September 2016, having held just over 2 per cent a year earlier.

When reporting the first quarter results earlier this month, A2 said demand had grown in both direct and cross-border e-commerce trade into China, and it had engaged what it called a leading China-based consultancy to assist in building market intelligence and scenario planning for the medium term.

"The reality is our business, our management has been able to respond to how product moves across different channels," Babidge said. "We've been demonstrating for some time that we have a multi-channel, multi-brand approach for how we sell into China."

In the United Kingdom, fresh milk sales were up 50 per cent compared to the same period a year ago, while sales in the US were described as "improving" in the key accounts of Whole Foods Northern California, Ralph's and Sprouts, and it has had "strong build" in Trader Joes in California.

The Australian legal case between A2 Milk and drinks giant Lion, which centres on the scientific evidence around the benefits of milk comprised solely of A2 Milk proteins, is due to be heard in November next year.

Shares of A2 Milk rose as high as $2.24 today, and closed at 2.17, a 4.8 per cent gain. They've advanced 11.3 per cent this year.

(BusinessDesk)

-BUSINESSDESK