A2 Milk anticipates strong revenue growth in 2020

A2 Milk chief executive Jayne Hrdlicka. Photo / NZ Herald.

A2 Milk shares jumped 14.2 percent after the company said it expects annual operating profit margin will be stronger than previously communicated and in the range of 29-30 per cent.

The shares jumped to $14.62 from $12.80 when trading opened at 10am, still shy of its record at $18.04 at the end of July.

The alternative milk and infant formula company said it expected to see strong revenue growth, supported by its investment in China and the United States, in the current financial year.

"Overall, for FY20 we anticipate continued strong revenue growth across our key regions supported by brand and marketing investment in China and the US and the development of both capability and infrastructure to support in-market execution," chief executive Jayne Hrdlicka said in notes prepared for the annual meeting today.

She said the company's earnings before interest, tax, depreciation and amortisation margin percentage was now anticipated to be stronger than previously announced, and in the range of 29-30 per cent.

The margin would benefit from improved price yields and a reduction in the cost of goods sold.

Shares in a2 Milk are expected to rally when the market opens at 10 am, on the back of a2 Milk's better than expected margins, Matt Goodson, managing director of Salt Funds, said.

"I would expect to see quite a sharp, postive reaction," he said. "The outlook comments were better than expectations."

The dual-listed company previously reported its June year earnings before interest, tax, depreciation and amortisation (ebitda) jumped by 46.1 per cent to $413.6m, driven by a 41.4 per cent lift in turnover to $1.31b.

A key measure for a2 Milk - its ebitda to sales margin - came to 31.7 per cent in the previous financial year.

The company's net profit after tax of came to $287.7 million in the year, up 47 per cent.

A2 Milk's shares peaked at $18.02 just before the release of the company's annual result in August but has since dropped back to close yesterday at $12.66.

The company commercialises intellectual property relating to A1 protein-free milk that is sold under the a2 and a2 MILK brands, as well as the milk and related products like infant formula.

For the first half of the financial year, a2 Milk anticipates revenue in the range of $780m to $800m.

China label infant nutrition sales forecast to be about $135m, representing a
growth rate of about 84 per cent.

China cross border e-commerce formula sales are forecast to reach $155m, representing a growth rate of about 54 per cent.

Australia-New Zealand English label infant nutrition sales forecast to be about $350m, representing a growth rate of about 9 per cent.

In a separate statement, a2 Milk said it had extended its supply agreement with its part-owned supplier, Canterbury-based Synlait Milk.

The 2018 agreement provided for a minimum term of five years, with a rolling three-year term from August 1, 2020.

The key components of the revised agreement are:

• A two-year extension to the term of the agreement, effectively providing for a new minimum term to, at the earliest, July 31, 2025.
• An increase in the volume of nutritional products over which Synlait already has exclusive supply rights
• Increased committed production capacity from Synlait.