Strong FY18 led by a2 Platinum market share wins
The A2 Milk Company (A2M) reported a strong FY18 result which was slightly ahead of recent guidance, our forecast and consensus. Underlying NPAT rose 116% to NZ$195.7m (approx. 2-3% beat) and underlying EBITDA increased 101% to NZ$283.0m. The impressive earnings growth reflected the benefit of strong revenue growth (+68%), which was led by infant formula (+84% and 79% of group sales). This favourable product mix supported strong expansion in gross profit (+230bps to 50.3%) and EBITDA margins (+500bps to 30.7%).
Australia/New Zealand posted 69% EBITDA growth and a2 Platinum's market share in Australian supermarkets increased to 32% (vs 26% at FY17 and 30% at 1H18). Similarly, China and other Asia reported a strong result (EBITDA +148%) and a2 Platinum's market share by value is also rapidly rising in China (5.1% over the year, 5.4% at 4Q18). Operating cashflow (+131% to NZ$231.1m) was materially better than expected and was the highlight of the result. This enabled the company to finish the year in a very strong balance sheet position with net cash of NZ$340.5m or 47 cents per share (vs. NS$121.0 for the previous corresponding period).
As expected, no dividend was declared.
Well placed to continue to deliver strong earnings growth
A2M did not provide formal FY19 earnings guidance and its outlook commentary remained unchanged from its update provided in June (although the tone from both the Chairman and management team was upbeat). As a result, we have made only minor changes to our forecasts reflecting A2M's additional investment in Synlait Milk for approx. NZ$161.8m.
We continue to forecast strong NPAT growth of 37.0% in FY19 and 29.4% in FY20. We believe growth will be underpinned primarily by further market share gains across all markets and channels, a positive impact from its recent price rises, incremental growth from new products and increased China MBS distribution.
A2M delivered a very strong result with the materially better than expected cashflow generation a clear highlight. Importantly, the company continues to grow its share of the domestic and China infant formula market and increase its distribution footprint in China's Mother & Baby stores.
It is worth highlighting that A2M continues to invest in the long-term profitability of its business by accelerating its marketing spend to increase brand awareness, expanding into new geographies (UK and USA) and developing new products. In the short-term, these efforts mask the underlying profitability of the business. It's balance sheet strength provides further optionality to deliver additional earnings growth over the long-term.
Trading on a PEG of 0.9x in FY19 and FY20, we maintain our Add recommendation and have increased our share price target.
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Disclaimer(s): Analyst owns shares.
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