a2 Milk Company Ltd upgrades profit on baby formula boom

Credit: Benjamin Horn

Shares in the a2 Milk Company Ltd (Australia) (ASX: A2M) are likely to enjoy a strong start to morning trade after it revised full year revenue and earnings guidance upwards in the region of 4.5% and 12% respectively.

The specialist milk and baby formula retailer now expects full year revenues between $350 million to $360 million, with operating EBITDA between $52 million to $54 million for the financial year ending June 30 2016. The group sells its specialist milk, dairy and infant formula products across Australia, New Zealand, North America and Asia.

Over the first half of 2016 the Chinese government introduced multiple new rules, tariffs and restrictions on the import of overseas foodstuffs, with other foodstuff exporters like Bellamy’s Australia Ltd (ASX: BAL) and vitamins specialist Blackmores Limited (ASX: BKL) also expected to be adversely affected by the changes.

However, today’s news suggests that a2 Milk’s baby formula sales into China have kept growing strongly over the period and this bodes well for baby formula rival Bellamy’s Australia, while Blackmores’ infant formula business has reportedly struggled to gain sales traction after a recent launch.

a2 Milk shares are up 185% over just the past year, with many observers expecting that infant formula sales into China could keep growing strongly over a 5-to-10-year time horizon due to the growing spending power of Chinese consumers.

The New Zealand-based group’s core business of selling a2 protein-based milk is also performing well, as Australian consumers in particular embrace a specialist milk product that is reported to contain health benefits for certain individuals.

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Motley Fool contributor Tom Richardson owns shares of Bellamy's Australia and Blackmores Limited.

You can find Tom on Twitter @tommyr345

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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