A2 Milk

A2 Milk

Infant formula provider, The a2 Milk Company (ASX: A2M) has been considered a ‘market darling’ in its relatively infant (pardon the pun) listing period. Earlier today (as many of you were probably waking up!), a2 Milk released its financial results for the six months ending 31st December 2018. Though the company’s operations are global, its core markets discussed further below, are Australia, China and the United States. Note that all figures below are denoted in NZD.

The a2 Milk Company recorded revenue growth of 41% to $613.1 million across the first half of the 2019 financial year, as compared to the previous corresponding period. In addition, EBITDA of $218.4 million was achieved during the period, ahead of general market consensus for a reading around $200 million. As has been the case historically, the company’s infant formula segment was to core driver of continued growth, rising  45.3%. Not to be outdone, its liquid milk segment continued to do relatively well, particularly in the domestic and United States markets (up 20.2%). Marketing and brand awareness is the focal driver behind the company’s growth strategy moving forward, evident in the first-half of FY19, up 75% to $45.5 million.

The Australian and New Zealand segment continues to drive growth, being the company’s primary market. The division recorded revenue and EBITDA growth of 37.5% and 64.9% respectively. A common feature of all major regions that a2 Milk operates, is expanding market share, with its fresh milk products collectively garnering 10% market share (double digits!). The a2 Milk Company regards itself as the ‘highest brand advertiser’ within both the infant formula and milk markers domestically.

Despite fears more broadly in the market of a potential slowdown in China consumer behaviour (particularly for more premium range products), a2 Milk recorded EBITDA and revenue growth of 41.6% and 50.1% respectively (as compared to the same period in FY18). The company indicates current market share of 5.7% in the Chinese market (in Tier 1 and Key A cities), growth on the 5.1% recorded at the end of the 2018 financial year. Meanwhile, a2 Milk has gathered momentum in the smaller regions (tiers B, C and D), testament to the strong e-Commerce channel that exists. Note that the a2 Milk Company acknowledged recent amendments to e-Commerce regulation, deeming such as having been anticipated in advance (this holds true for its competitors as well).

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Despite fears more broadly in the market of a potential slowdown in China consumer behaviour (particularly for more premium range products), a2 Milk recorded EBITDA and revenue growth of 41.6% and 50.1% respectively (as compared to the same period in FY18). The company indicates current market share of 5.7% in the Chinese market (in Tier 1 and Key A cities), growth on the 5.1% recorded at the end of the 2018 financial year. Meanwhile, a2 Milk has gathered momentum in the smaller regions (tiers B, C and D), testament to the strong e-Commerce channel that exists. Note that the a2 Milk Company acknowledged recent amendments to e-Commerce regulation, deeming such as having been anticipated in advance (this holds true for its competitors as well).

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The company termed first-half performance as ‘very strong’. The a2 Milk Company projects revenue growth across the second half to be ‘broadly in line’ with that experienced across the first half of the financial year. With that being said, a2 Milk notes the second-half of the financial year as a period for the company to reinvest, building continued investment in brand awareness (marketing). On the back of such, the company subsequently anticipates EBITDA margins across the second-half to be lower relative to the first-half; 2019 full financial year EBITDA as a proportion of sales forecasted to range between 31% and 32%

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Today’s release reaffirms The a2 Milk Company’s status as a ‘market darling’, reflective of the share price movements through the Wednesday trading session. Further, the ‘growth’ nature of the company is reiterated by the lack of an inaugural dividend distribution, rather electing to continually reinvest back into the business, particularly with respect to marketing in China and the United States. A strong result from the business, with the key as we progress through the second-half of the 2019 financial year and beyond, being the ability of the business the increase its footprint in the Chinese and US markets; in terms of population demographics, of larger size than their current primary, domestic market.

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