A2 Milk share price on watch amid earnings beat and NZ$150m buyback

A2 Milk has released its full year results…

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Key points

  • A2 Milk has released its full year results for FY 2022
  • The company has returned to growth and delivered earnings ahead of estimates
  • It also announced plans to return NZ$150 million to shareholders via a buyback

The A2 Milk Company Ltd (ASX: A2M) share price will be on watch on Monday.

That's because the embattled infant formula company has just released its highly anticipated full year results for FY 2022.

Though, it is worth noting that the market is expected to crash deep into the red today. So, the A2 Milk share price could tumble regardless of this result.

A2 Milk share price on watch after earnings beat and buyback

  • Revenue up 19.8% to NZ$1,446.2 million (up 11.2% excluding Mataura Valley Milk (MVM) acquisition)
  • Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) up 59% to NZ$196.2 million
  • Net profit after tax up 42.3% to NZ$114.7 million
  • Inventory up to NZ$140 million including MVM
  • Cash position of NZ$816.5 million
  • NZ$150 million on-market share buyback
  • Outlook: High single digit revenue growth in FY 2023

What happened in FY 2022?

For the 12 months ended 30 June, A2 Milk reported a 19.8% increase in revenue to NZ$1.446.2 million and a 42.3% jump in net profit after tax to NZ$114.7 million.

This reflects the acquisition of MVM, China label and English label infant formula sales growth of 12.2% and 11.6%, respectively, and ANZ and USA liquid milk sales growth of 1.8% and 30.2%, respectively.

In respect to its infant formula operations, management highlights that record market shares were achieved in China label infant formula in mother and baby stores and domestic online. In addition, English label infant formula market share in cross border e-commerce (CBEC) increased in the second half and offline-to-online over the full year. This was driven by a significant increase in brand awareness following a 36.3% increase in marketing investment.

Positively, record market shares were also achieved in Australia and USA milk.

In light of this return to form and its improved outlook, the company has elected to return funds to shareholders via a NZ$150 million on-market share buyback

How does this compare to expectations?

The good news for the A2 Milk share price is that this result appears to have come in ahead of expectations.

For example, according to a note out of Bell Potter, its analysts were expecting the company to report a 34.5% increase in profit after tax to NZ$108.6 million. This was a touch lower than the market consensus estimate of NZ$113.9 million.

As you can see above, A2 Milk has outperformed both estimates with its profit of NZ$114.7 million.

The company was also guiding to half on half revenue growth. During the first half, A2 Milk reported revenue of NZ$660.5 million. This means that its second half revenue was NZ$785.7 million, which was up 19% half on half. Another tick.

Management commentary

A2 Milk's managing director and CEO, David Bortolussi, was pleased with the company's performance in FY 2022. He said:

It was a successful year for The a2 Milk Company returning to double digit growth in revenue and earnings despite significant headwinds. We are pleased with the progress that has been made in stabilising the business, refreshing our strategy and improving our execution.

Our significant increase in marketing investment has driven further gains in brand health metrics and record market shares delivering strong growth in our China infant milk formula business. We are pleased with the transition of our English label product distribution to more transparent, performance-based and exclusive partners. We remain committed to the Daigou channel and have increased our direct engagement and marketing support with more Daigou supporting the brand.

Our on-market buyback of up to NZ$150 million demonstrates effective capital management and the improved confidence we have in our strategy, execution and outlook.

Outlook

A2 Milk is guiding to high single digit revenue growth in FY 2023 thanks largely to its infant formula business.

However, management is expecting its gross margin to be relatively flat, with cost of goods sold headwinds related to increasing milk, ingredient and packaging costs offset by price increases, mix benefits and cost mitigation initiatives.

The company also intends to continue to increase its brand investment in FY 2023. Marketing spend will be skewed marginally towards the first half with a significant uplift versus the prior corresponding period due to campaign timing.

Nevertheless, the company is expecting EBITDA growth in FY 2023 and a modest improvement in EBITDA margin.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. 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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