New Zealand-based dairy group A2 MILK FPO NZ (ASX: A2M) has provided a trading update this morning whilst also updating the market on the recent Expression of Interest (EOI) it received from Dean Foods and Freedom Foods Group Ltd (ASX: FNP).
The company said that the underlying trading result for the 2015 financial year (FY15) is tracking ahead of plan with group revenue rising 39% over the prior corresponding period to NZ$154 million. It expects revenue will skyrocket another 73% in FY16 to NZ$267 million while group operating earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to hit NZ$12 million – up 200% from the $4 million expected in FY15.
A geographic breakdown of expected revenue and EBITDA performance can be seen in the chart below:
Source: The A2 Milk Company
Notably, one of the biggest drivers of growth in FY15 was an increase in volumes of a2 Platinum infant formula across Australia and New Zealand and China. Of course, it will be competing with the likes of Bellamy's Australia Ltd (ASX: BAL) in this regard, although there is certainly room for more than one company in this huge (and growing) market where supply simply cannot keep up with demand.
To quote the company: "Infant formula is emerging as a significant growth driver for the Company. The growth of a2 Platinum® infant formula exceeded expectations in the current year with revenue of NZ$41 million across ANZ and China. The majority of sales occurred within the Australian grocery and pharmacy channels, although the Company believes a proportion may relate to products which are on-sold into China, as is the case with other premium infant formula brands sold in domestic markets."
A2 Milk said that total infant formula revenue hit NZ$41 million (26.6% of total revenue) – a trend set to continue in 2016 – while NZ$110 million of revenue was generated from liquid milk sales.
In relation to the Expression of Interest (EOI) the company recently received, a2 Milk said that it has asked for further information from both Freedom and Dean Foods. Notably, the Board does not think that the EOI is compelling and is not in a position to recommend it to shareholders. However, it has received other enquiries indicating potential interest in the company and is in the process of evaluating these.
Should you buy?
A2 Milk differentiates itself from other dairy producers in that its products only contain A2 milk proteins, leaving out the A1 milk proteins that most other commercial milks include (which the company suggests can leave some consumers feeling nauseated or with stomach pains).
Indeed, A2 Milk is well positioned to benefit from growing global demand for Australian and New Zealand agricultural products, especially in markets such as China where consumers question the quality of locally produced formula (largely due to the country's pollution).
In saying that however, the company's shares have surged in recent weeks as a result of the takeover speculation which suggests the stock could be susceptible to a heavy fall in case such an offer does not eventuate. Bellamy's is also in an excellent position to benefit from the same tailwinds as a2 Milk and could be a greater buy at today's prices.
