Why a2 is the cream of the crop
A2 Milk is set to report another year of explosive earnings growth next week. Investors will find out on Wednesday whether the company’s performance can justify the share price, which has been on a near exponential growth path over the past couple of years.
Going on the most pessimistic of market expectations, a2 Milk is looking like it will at least double its net profit after tax for the June year.
That will build on the previous year’s net profit of $90.6 million, which was triple from the year before that.
Much of a2 Milk’s growth path can be put down to its success in Australia, which became a springboard for its entry to the China infant formula market.
Now the company has turned its sights to the United States, where there are signs that it may be gaining some traction.
Data from Nielsen Retail Measurement Services for the week ending July 28 shows that sales of traditional milk products in the US dropped 4 per cent, year-over-year to $227m.
Conversely, sales of milk alternatives are up 8 per cent over the same period, reaching nearly $35m.
Not all traditional milks have struggled, Nielsen said.
“During the week, Maola Milk & Ice Cream Co, Grupo Lala S.A. and The a2 Milk Company had the highest rise in dollar sales compared to a year ago,” it said.
The consensus market forecasts for a2 Milk’s result is for a net profit of $190m for the June year.
Shareclarity has a net profit forecast of $206m because it does not expect a2 Milk’s tax rate and tax provision to be as high as the market’s expectation.
A2 Milk has already said that it expects its revenue for the June year to come in at around $922m, representing growth on the prior corresponding period of 68 per cent.
The year to date has seen some big changes at a2 Milk.
Chief executive Jayne Hrdlicka has taken over from Geoff Babidge, and the company has teamed up with the world’s biggest dairy exporter — Fonterra — to jointly market a2 milk in New Zealand under the Anchor brand.
A2 Milk’s share price lifted sharply on the Fonterra tie-up but moves by Nestle’s to launch an A1 beta-free product in China saw the price take a big knock back in March.
Early this month, a2 Milk said it had spent $161.8m on an additional 8 per cent stake in Synlait from Japan’s Mitsui, taking its holding to 16 per cent.
Shareclarity managing director Daniel Kieser sees the move as being significant, as a2 Milk will now have a “blocking stake” in one of its two New Zealand suppliers.
“Synlait can no longer be sold without a2 Milk’s approval, which means it has better security of supply,” he said.
“More importantly, it will keep the pricing pressure between Fonterra and Synlait,” he said.
With a 16 per cent shareholding, a2 Milk will get at least one Synlait director, he says.
“And while they may be conflicted out of making decisions that involve a2 Milk, they will get Synlait’s operational and market insights,” he said.
“This could be especially valuable in the United States where both companies are trying to go,” Kieser said.