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Here’s why shares of a2 Milk Company Ltd (Australia) are set to soar

A2 milk shares
Credit: Benjamin Horn

Dairy and infant formula business a2 Milk Company Ltd (Australia) (ASX: A2M) has produced a stellar first-half earnings report today. Not only did it announce a massive 86% increase in revenue over the prior corresponding period (pcp), it also increased its full-year earnings guidance yet again.

The company’s New Zealand-listed shares soared more than 27% early in today’s session, implying a strong day for Australian shareholders.

The Results

The a2 Milk Company was one of the top-performing shares on the ASX in the latter half of 2015 as a result of its booming sales of infant formula at a time when the so-called “white gold” was experiencing a heavily-publicised shortage.

The shares have continued to surge higher, spurred on by a series of updates to earnings guidance that came late in the year leading into Christmas. Most recently, it guided for full-year revenue to be between $300 million and $315 million, while earnings before interest, tax, depreciation and amortisation (EBITDA) are expected to be between $33 million and $37 million.

The company only reported its results for the first six-months of the year today, but they were certainly impressive. Here were some of the results:

  • Total revenue of $139.1 million, up 86% on the pcp
  • Sales of its a2 Platinum infant formula product soared 340% to $73.9 million (Notably, the company had already advised that sales of this product had reached $38 million in the four months ended 31 October, 2015. That suggests it made another $35.9 million in the final two months of the half-year)
  • Group EBITDA up 472% to $18.7 million
  • Net profit after tax (NPAT) of $10.1 million, up from $0.1 million in the pcp

Given that the EBITDA result was already more than half of a2 Milk’s upper guidance for full-year EBITDA ($37 million), the company has, understandably, increased its full-year guidance yet again.

It’s now telling investors to expect revenue in the range of $335 million to $350 million and group EBITDA between $45 million and $49 million. The mid-point of the new EBITDA guidance is an astonishing 34% improvement on the guidance provided as recently as December.

What happens now?

The company’s infant formula is clearly a huge hit with customers, and is driving much of the company’s growth. What could help drive earnings even higher is growth in its direct sales into China, which is something that a2’s rival Bellamy’s Australia Ltd (ASX: BAL) is also capitalising on. Meanwhile, an increase in its production schedule with the NZ-based Synlait Milk Limited should also help it to meet the growing levels of demand.

What’s more, the company is also developing a growth strategy into the United Kingdom and United States markets, while it has also identified a “significant growth opportunity” in its a2 Milk branded milk powder, which was launched in limited release from June 2015.

It is clear this was a very strong result from a2 Milk, and it certainly goes a way towards justifying the company’s soaring share price. Although the shares aren’t cheap, per se, they could be well worth holding onto for the long-run.

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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