A2 Milk Company Ltd (ASX: A2M) shares have risen around 70% in 2024 to date, as shown on the chart below. Despite recent Chinese headwinds, the company is expected to see growing profit in the coming years.
This leading New Zealand infant formula business has managed to navigate the difficulties and uncertainties caused by the COVID-19 pandemic, and investors now seem to be looking forward to a positive outlook.
With the FY24 half-year result, the company noted it had gained a "significant" market share in the Chinese label infant formula over the prior few years, leading to revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) growth.
The A2 Milk Chinese infant formula market share has reached 6.4%, "becoming one of the most successful brands in China and in the top-5 overall." The business has focused on more 'controlled' channels, away from the daigou channel.
A2 Milk warned that due to China's annual birth rate declining, it may take until FY27 (or later) to reach its $2 billion target of annual revenue rather than FY26. It's still targeting an EBITDA margin "in the teens".
Having said all of that, the business is still expected to deliver growth in the next few years, according to the broker Goldman Sachs' estimates on Commsec.
FY24
In FY23, the business generated NZ$1.59 billion of revenue, NZ$219.3 million of EBITDA and NZ$155.6 million of net profit after tax (NPAT).
Goldman Sachs expects growth across all those financial metrics in the 2024 financial year, which ends this month.
The broker thinks A2 Milk's annual revenue can increase to NZ$1.69 billion (up 6%), which could support EBITDA rising by 8% to NZ$237.4 million. The NPAT could increase 9% to NZ$169.8 million based on the projections.
If those predictions come true, it shows the company's profit margins could grow, which would be a positive for A2 Milk shares.
FY25
Goldman Sachs suggests the business could continue growing in FY25.
Annual revenue is projected to rise another 6.25% to NZ$1.79 billion in FY25, with EBITDA increasing by 15.5% to NZ$274.2 million. NPAT could then grow another 13.3% to NZ$192.4 million. So, the predictions suggest another year where profit could rise faster than revenue, implying improving margins.
FY26
The broker thinks there could be yet another year of earnings growth for owners of A2 Milk shares in the 2026 financial year.
A2 Milk's annual revenue is predicted to rise another 5% to NZ$1.89 billion, with EBITDA projected to increase 10.7% to NZ$303.6 million and NPAT predicted to rise around 12% to NZ$215.2 million.
The infant formula market has been difficult to forecast over the last five years with a lot of unpredictability. Still, if the company can keep growing earnings, it could be a helpful tailwind for A2 Milk shares.
