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A2 Milk Company share price on watch after guidance upgrade

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The A2 Milk Company Ltd (ASX: A2M) share price could be on the move today after the release of a trading update.

What did a2 Milk Company announce?

Investors have been fighting to get hold of the company’s shares during the coronavirus pandemic on the belief that it is experiencing strong demand for its products.

This view was reinforced with a recent third quarter update by smaller rival Bubs Australia Ltd (ASX: BUB). The infant formula company posted a 67% jump in sales on the prior corresponding period and a sizeable 36% lift on the second quarter.

Well, this morning a2 Milk Company revealed that those investors were on the money.

Since the release of its half year results at the end of February, a2 Milk Company has continued to experience strong revenue growth across all key regions. This has particularly been the case with infant nutrition products sold in China and Australia.

According to the release, the company’s revenue for the third quarter of FY 2020 was above expectations.

Management advised that this primarily reflects the impact of changes in consumer purchase behaviour arising from the COVID-19 situation. This includes an increase in pantry stocking of its products via online and reseller channels.

While this is clearly a positive in the short term, it has warned that it is unable to estimate the timing and extent to which pantry stocking may unwind.

In addition to this, the company is benefiting from a significant depreciation of the New Zealand dollar. This is because its China segment transacts in US dollars.

Its margins have also been benefiting from lower overhead costs. This is due to travel restrictions and some planned recruitment, particularly in China, being temporarily delayed.

FY 2020 guidance upgrade.

Given the COVID-19 pandemic, management notes that the outlook for both revenue and earnings remains uncertain in FY 2020. Especially with the uncertainty around the potential impact on supply chains and consumer demand in its core markets.

Nevertheless, management has provided guidance for the full year. It currently expects revenue in the range of NZ$1,700 million to NZ$1,750 million and an EBITDA margin in the range of 31% to 32%. This assumes that planned marketing activity for FY 2020 of NZ$200 million, weighted to the second half, will be fully expended prior to the year-end.

This compares to its guidance for “strong revenue growth” in the second half and a full year EBITDA margin in the range of 29% to 30%. It will also be a big lift on the revenue of NZ$1,304.5 million and EBITDA of NZ$413.6 million it achieved in FY 2019.

The top end of its guidance range implies revenue of NZ$1,750 million and EBITDA of NZ$560 million. This would be a 34.1% and 35.4% increase, respectively, on the prior corresponding period.

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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. The Motley Fool Australia has recommended BUBS AUST FPO. 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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