Share price jumps as earnings at a2 Milk surge

Net profit in four months to October up 137.7pc to $52.4m, CEO tells investors

A2 Milk says its growth trajectory remains intact as the alternative milk company posts a sharp lift in earnings over the first four months of its financial year.

Chief executive Geoff Babidge told a packed annual meeting of around 200 shareholders in Auckland that the company’s net profit in the four months to October was $52.4 million — up 137.7 per cent on the same period last year.

That followed a $90.6m net profit for the June year, up 198 per cent on the previous year.

Revenue for the four months came to $262.2m, up 68.9 per cent on the previous corresponding period.

Oyvinn Rimer, senior research analyst at Harbour Asset Management, said a2 Milk’s margins had risen strongly in the four months.

“The level of profitability is lifting significantly,” he said.

The company, at its last annual result, had hinted at declaring a special dividend but at yesterday’s meeting Babidge said any decisions on a2 Milk’s capital structure had been pushed out to next February, when the company would make its next market update.

Slides from yesterday’s meeting showed the company had $121m in cash on hand at the end of June.

Rimer said a special dividend would be welcomed by some shareholders, but a2 Milk was prudent to keep reinvesting in future growth opportunities.

Babidge told the annual meeting that the company had made significant progress in the past decade.

The stock has been the star performer on the NZX this year, hitting a record high of $8.75 on October 30. The share price leapt 42c, or 5.36 per cent, to close yesterday at $8.26 — up 287.8 per cent for the year to date.

A2, which markets an alternative A1 beta-casein-free milk, this year surpassed Fletcher Building and a clutch of other market heavyweights in terms of its market capitalisation.

Fund managers said the company had remained well regarded, particularly because of its success in negotiating the unofficial “daigou” trade channels into China.

Asked if he had ever envisaged the company growing at such a rate, Babidge told the Herald: “I have always had a positive view as to the significant potential, but it’s fair to say Geoff Babidge says a2 Milk has made big progress in the past decade.

It’s fair to say that the growth that we have seen over the last two or three years has exceeded all of our expectations. Geoff Babidge, a2 Milk chief executive

that the growth that we have seen over the last two or three years has exceeded all of our expectations.”

Legal action with food and beverage company Lion Group in the Australian Federal Court that was scheduled for hearing later this month has been shunted to next year due to a scheduling issue at the court, he said.

The case relates to a claim on Lion’s packaging that Pura and Dairy Farmers branded milk “naturally contains A2 protein”.

Babidge told the meeting: “We continue to be extremely confident in respect of achieving a successful outcome in respect of the court action.”

He highlighted the success of the company’s infant formula business, which now accounts for 72 per cent of group revenue.

Over the year, group infant formula revenue came to $394m, compared with $214.4m in 2016.

In Australia, a2’s Platinum brand is the fastest-growing infant formula brand by value.

Direct sales of formula into China had increased significantly in the cross border e-commerce channels and mother and baby retail stores.

Over the year, China achieved 150 per cent growth in infant formula sales over the previous year.

The company has established a presence in the United States, with a focus on the West Coast and intended to expand in the second half of 2018.

A2’s financial outlook assumes US$25m of investment in the US before reaching positive monthly earnings there by 2020.