The A2 Milk Company Ltd (ASX: A2M) share price will be one to watch on Thursday after the infant formula and dairy company released its FY 2018 guidance and outlook for FY 2019.
At present the company’s New Zealand-listed shares are down over 1.7% in early trade, indicating that its ASX-listed shares could also be on the decline on Thursday.
What was in the update?
According to this morning’s release, a2 Milk Company achieved unaudited sales of approximately NZ$922 million for the 12 months ended June 30 2018.
This represents growth of 68% on the prior corresponding period and is ahead of the guidance range of NZ$900 million to NZ$920 million provided to the market in May.
Management also advised that it expects to report an earnings before interest, tax, depreciation, and amortisation (EBITDA) margin of approximately 30%. In FY 2017 its EBITDA margin was 26%.
This would mean EBITDA of NZ$276.6 million in FY 2018, up 96% on the $141.2 million it achieved last year.
What is expected in FY 2019?
Assuming general trading conditions do to not change materially in FY 2019, the company expects further growth in revenue, particularly in respect of nutritional products.
It does, however, expect costs to rise. Its marketing expenditure as a percentage of sales is expected to rise due to continued investment in Australia, re-phasing of second-half activities in China, and an elevated investment to support its expansion in the United States.
Overhead costs are also expected to rise due to an increasing headcount in China and its head office, together with one-off costs associated with the transition to its new CEO.
Pleasingly, though, these costs are expected to be offset by its revenue growth, leading to its EBITDA margin remaining broadly in-line with this year’s result.
Should you invest?
I thought this was a solid result from a2 Milk Company and believe it goes some way to justifying the premium that its shares are trading at today. However, it might be best to wait for the dust to settle before making an investment.
In the meantime, the beaten down Bellamy’s Australia Ltd (ASX: BAL) share price could be in the bargain bin now if you ask me. This could make it a great alternative.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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 Scott Phillips.