Market set for 50 per cent lift in a2 Milk profit on big Wednesday

A2 Milk managing director and CEO Jayne Hrdlicka, during a launch of the partnership between A2 and Fonterra's Anchor milk brands which have started supplying to North Island stores. 2 August 2018 New

A2 Milk - one of the sharemarket's most volatile stocks - reports its annual result tomorrow and is expected to post another hefty increase in its earnings, despite a shift away from its traditional "daigou" channels that convey product into the important Chinese market.

It's a stock that polarises market opinion, but it's also one that has played a key role in the New Zealand sharemarket's record-breaking bull run over the last few years.

Some have remained sceptical about the science behind the a1 beta-free protein on which the company's infant formula is based, while believers are adamant a2 products are helpful for those who have trouble digesting milk.

From tiny beginnings, the stock now level pegs with Meridian Energy with a market capitalisation of around the $12 billion mark.

A2 shares have been on a rollercoaster ride from day one and this year has been no exception.

The stock started the year at $10.75, then hit a record high of $18.02 in July on the back of a series of broker upgrades.

By the close yesterday, a2 Milk was back at $16.23.

Harbour Asset Management senior research analyst Oyvinn Rimer said analysts were waking up to what looks likely to be an improved outlook for a2 Milk after one full year under the control of chief executive and managing director, Jayne Hrdlicka.

Much of a2 Milk's success in the Chinese infant formula market has been put down to daigou, which has involved individuals and businesses buying product outside the normal channels and sending them to China for sale.

Now, it looked as if there had been a shift away from daigou towards the bigger platform cross-border e-commerce channels that typically base themselves in Hong Kong and mainland China.

"I think the company has demonstrably changed their channel mix," Rimer said.

"They have moved away from the smaller daigou sales - where they have been quite big - towards the cross border commence platforms," he said.

"They are corporate distribution businesses, and it's my sense that they too have taken business from the smaller daigou."

A2 is also expected to provide an update on how that transition is going.

"I think it is going quite well, but the volatility in the share price suggests that the market still has not made up its mind," Rimer said.

Much of the a2 story belongs to Australia, which was quick to adopt the a1-beta free model and where a2 milk accounts for more than 10 per cent of the fresh milk market there.

From there the company's move into infant formula in Australia enjoyed similar success, resulting in widespread daigou sales of formula to China.

In its last update in February, a2 Milk said it had 5.7 per cent of China's infant formula market.

Now the company is attempting to replicate its Australian experience in the United States, where Rimer says it is already making inroads into fresh milk sales.

"The US is going to be critically important as well, just to show some continuation of momentum," he said.

In a2 Milk's result, the consensus of market expectations is for a net profit after tax of $297m, which would be a 51.6 per cent increase on the previous year's.

Expectations are for a revenue to come to $1.31 billion, up 42 per cent, and earnings before interest, tax, depreciation and amortisation of $425m, up 50 per cent.

In July, UBS analysts said they expected a net profit of $308m, which would be a 57.5 per cent lift on the previous year's.

For the current financial year to June 30, 2020, UBS saw revenue of $1.6b, and a net profit of $367m.

In the last half-year period alone, Craigs Investment Partners expects a 45 per cent lift in net profit to $141m.

Tomorrow has been dubbed "big Wednesday" with results from other market heavyweights Spark and Fletcher Building also due.