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Why the A2 Milk share price is up over 5%

The A2 Milk Company Ltd (ASX: A2M) share price is up more than 5% after the infant formula business announced its FY20 half-year result.

A2 Milk’s impressive performance

A2 Milk reported that its total revenue rose by 31.6% to NZ$806.7 million. The infant nutrition segment saw sales growth of 33.1% to NZ$659.2 million with China label infant nutrition sales growing by 100% to NZ$146.7 million, distribution has expanded to 18,300 stores. Total liquid milk sales increased by 28.7% to NZ$104.4 million. US milk revenue more than doubled and the distribution has expanded to 17,500 stores.

Its gross profit margin improved to 57.2% with the continuing mix shift to infant formula as well as increased prices.

The company managed to increase earnings before interest, tax, depreciation and amortisation (EBITDA) by 20.5% to $263.2 million with the EBITDA margin of 32.6% being better than expected because of the gross profit margin.

Net profit after tax (NPAT) grew by 21.1% to NZ$184.9 million and earnings per share (EPS) increased by 20.6% to NZ 25.15 cents.

The company generated NZ$160.6 million of operating cash flow and finished with NZ$618.4 million of cash on the balance sheet. It has no debt.

Outlook

The company continues to expect strong revenue growth across its key regions as it continues to spend on marketing in China and the US.

The coronavirus has created uncertainty, particularly surrounding supply chains and how it will affect demand in China. Online and reseller demand remains strong and revenue was above expectations in the first two months of the second half.

The EBITDA margin for the full-year is still expected to be in the range of 29% to 30% with a long-term goal of 30% which reflects the ongoing investment in marketing. There could be increased supply chain costs as a result of the coronavirus.

I can see why investors pushed the A2 Milk share price higher today on this strong result, but I’d wait before buying A2 Milk shares – the coronavirus could have a negative effect on both the profit and share price of A2 Milk if it keeps spreading.

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Motley Fool contributor Tristan Harrison 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.

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