The a2 Milk Company Ltd (Australia) (ASX: A2M) share price could have a bumper day today, after management released the results for what might conservatively be called a very good half. Here's what you need to know:
- Revenues rose 84% to $256 million
- Operating Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) rose 243% to $64.1 million
- Net Profit After Tax rose 290% to $39.4 million
- Wider range of distribution and organic sales growth in most markets; UK segment delivered a positive contribution to earnings
- Further progress on studies into digestive effects of a2, with some Chinese research currently awaiting publication
- Outlook for lower formula sales in second half (but still significantly above last year), plus additional investment of up to $15 million in marketing for the US and China
- New 5-year supply agreement struck with Synlait, with no take-or-pay arrangements
- $108 million in cash and no debt
(all figures are in NZ Dollars)
So What?
It's tough to get a picture of a2's progress without looking at how sales performed in each of its geographic regions. The ANZ region drove the majority of the earnings increase, with revenue and operating EBITDA rising 62% and 104% respectively. Growth occurred in all categories but was primarily driven by the increasing uptake of a2 Platinum infant formula – which also includes demand from Australian based resellers into China. Fresh milk sales grew a much more modest 3%.
China and the UK also performed well with strong advertising campaigns driving uptake of a2 products. The combined USA-UK segment remains a financial black hole, although new supply and distribution agreements should see improvement in US sales in the future. Management considers its US program to be ahead of schedule, and will dramatically increase its investment in this region over the next couple of years.
Progress continued on a variety of studies into a2 proteins, although further publications on its effects are not expected until the second half. The health value of a2 proteins, if established, will really underpin the company's case for its products and investors should pay attention to this area.
Management also took the opportunity to distance itself from Bellamy's Australia Ltd (ASX: BAL), pointing out that they employ 'conservative management of infant formula inventory' and are not beholden to take-or-pay agreements with their dairy suppliers.
Now What?
A2 declined to provide full-year guidance, although it indicated a cyclically weaker second half due to major sale events in China all taking place in the first half. The company also announced it would likely begin paying dividends after the end of this financial year, assuming no upsets.
Now, the tough question for investors is: 'What should I pay for the shares?' A2 has strong growth prospects in each of China, the UK, and the USA. Yet we also saw that growth in fresh milk sales in the ANZ segment was pretty bland, rising just 3%. While this might change in the future as scientific evidence mounts, it suggests that expansion into new markets is much more important than increasing the population's level of uptake in an existing market like Australia.
To my mind I'd consider a2 a good purchase at around $2 or below.
