Why the A2 Milk Company Ltd (Australia) share price is going gangbusters again

The A2 Milk Company Ltd (Australia) (ASX:A2M) share price jumped 18% to $10.27, after the company released its interim results this morning. Revenues grew 70% to $435 million, and net profit after tax (NPAT) rose 150% to $98.5 million.

Earnings per share were up 147% to 13.6 cents, and the company did not announce a dividend. a2 continues to consider “an on-market share buyback and implementation of a dividend policy.”

From a business perspective, a2 Milk hit plenty of milestones in the half, with its Australian baby formula market share climbing from 26% to 30%. Fresh milk revenues rose by around 3% during the half, and a2’s market share in this segment is now 9.5%. China remained a powerhouse with revenues growing 204% to $114 million, and market share rising from 3.5% to 5.4%.

UK fresh milk sales grew 50% and management is investigating an expansion into the Middle East or Europe. The UK segment is still tiny relative to ANZ and China, and is unlikely to be a serious contributor to earnings for several years. Progress was made in the USA, although this segment remains loss-making and required a $25 million investment from a2 Milk. The USA is expected to break even in financial year 2020 (which ends in July 2020).

One other notable piece of news during the half was that a2 Milk announced a strategic partnership with supplier FONTERRA UNIT NZX (ASX: FSF) (‘Fonterra’).

Under a manufacturing supply agreement, Fonterra will provide a2 Milk exclusively with the eponymous a2 milk. It appears as though the companies have elected to work more closely at spreading a2 milk products, including new dairy products like butter and cheese. a2 and Fonterra will also investigate the possibility of jointly investing into a packaging facility to support its growth.

a2 expects a weaker second half due to higher marketing investment. It stated that it expected half on half profit growth to be around $35 million to $40 million in the second half. It’s not clear, but if A2 means ‘half-on-half’ in terms of the first half this year, then the company could be forecasting second half profit of around $133.5 million ($98.5 million this half, plus $35 million to $40 million). That would price the company at around 32x full year profits of approximately $232 million.

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