Why the a2 Milk Company Ltd (Australia) share price is soaring

Credit: Benjamin Horn

Shares in $1.4 billion a2 Milk Company Ltd (Australia) (ASX: A2M) rose 4% to $1.95 after the company released a presentation and its first quarter results to the market today. Revenue growth continues apace, although losses persist in the US market. Here’s what you need to know:

  • Revenues of NZ$112.5 million in the first quarter, up approximately 40% from first quarter last year
  • Fresh milk sales rose 7% in ANZ compared to prior comparative period (‘pcp’)
  • Growing demand (unquantified) in China plus strengthening of management team and progression towards registering its infant formula (a regulatory requirement)
  • New accounts at Trader Joe’s and Target in USA, sales at existing customers are improving
  • However, anticipated investment of US$20 million to US$25 million over next 2-3 years will be required to achieve positive monthly earnings in the USA
  • UK fresh milk sales up 50% from a low base
  • Science progressing well with one clinical trial finding higher antioxidant levels following A2 milk consumption compared to regular milk
  • A number of human studies on Irritable Bowel Syndrome (IBS) and pre-schoolers and infants are underway

So What?

A great result from a2 so far, with ongoing strong sales growth in ANZ as well as pleasing developments in China and the UK. The USA still looks like a tough sell, although growing sales and new accounts (stores that stock a2 Milk) are a positive. Over the next few years, growing clinical evidence should definitely help sales in this market.

Even better was the progress made by the company on the research front, with one new study from the UK finding that consuming milk that contained only a2 proteins led to a significant increase in glutathione (a potent antioxidant) levels in humans. While not directly related to a2’s claims of better digestion, such a claim should definitely prove useful if confirmed by further research. Other research is progressing on a variety of fronts (see page 19 of today’s presentation).

Now What?

One potential drawback is a2’s price, with the company valued at some 40 times last year’s earnings. Revenue growth of ~40% will go a long way to alleviating this if it can be sustained for the full year, but investors must be sure not to overpay.

Additionally, the ongoing investment process in the US will chew through around half of the company’s cash balance. While a2 is profitable and appears to have enough funds for the future, unforeseen expenses such as possible loss of the lawsuit against Lion, or greatly increased investment requirements in the UK or China could see the company having to raise more funds.

Overall I thought it was a great announcement and I remain a happy a2 shareholder. Shares in competitor Bellamy’s Australia Ltd (ASX: BAL) were also up today, rising 3% to $11.43.

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Motley Fool contributor Sean O'Neill owns shares of A2 Milk. The Motley Fool Australia owns shares of A2 Milk and 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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