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A2 Milk – Strong FY20 Result But The Market Is Disappointed

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

A2 Milk Ltd (ASX: A2M) was founded in New Zealand that has now expanded in Australia, China and the United States (US). A2 Milk specialise in milk products, specifically, the brand called A2 Milk. A2 Milk is different from conventional cows’ milk because it comes from cows selected to naturally produce only the A2 protein type and no A1 protein. A2 Milk has a market capitalisation of around A$14 billion.


What are the key features of A2M’s FY20 result?

A2M reported net profit after tax for FY20 of NZ$385.8million, an increase of 34.1%. Total revenue for FY20 was NZ$1.73 billion, an increase of 32.8%. A2M estimates that COVID-19 had a modest positive impact on revenue and earnings for the year. Additionally, our business was favourably impacted by foreign exchange movements. In terms of products, the result reflects the continued growth in A22’s infant nutrition segment with sales totalling $1.42 billion for the period, an increase of 33.8% on the prior corresponding period. A2M decided not a pay a dividend in respect of FY20 earnings.

Revenue from A2M’s Asia Pacific business was NZ$1.66 billion (up 31.5%), with EBITDA of NZ$690.5million (up 32.0%). A key component of this outcome is that China & Other Asia segment revenue increased 65.1% to NZ$699.4million, with EBITDA of $224.9million (up 66.7%). These results are an outcome of consistent investment in advertising, A2M’s strategy of pursuing distribution in high productivity stores and optimising in-store execution. These efforts are underpinned by increased data analytics capability to ensure A2M’s investments are optimised.

In the United States, revenue totalled NZ$66.1 million, representing growth of 91.2% compared to the prior corresponding period with brand awareness more than doubling, conversion rates up significantly. Encouragingly, over 50% of A2M’s sales growth was driven from existing stores. The US market represents a significant growth opportunity for A2M.

What is the outlook for A2M?

A2M’s management notes that there continues to be uncertainty resulting from COVID-19, and the potential for moderation of economic activity. This could impact consumer behaviour in A2M’s core markets, as well as participants within the supply chain, most notably in China. Notwithstanding these uncertainties, overall for FY21, A2M expects continued strong revenue growth supported by continued investment in marketing and organisational capability. FY21 EBITDA margin is expected to be in the order of 30% to 31% (in line with the FY20 result of 31.7%) reflecting higher raw and packaging material costs partially offset by price increases and an increase of marketing investment.

What is the market’s reaction to A2M’s FY20 result?

A2M’s share price fell around 6% to around $18.30. This suggests that the market was disappointed with the result. A2M trades at a forward P/E ratio in the high thirties.



This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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