A slight beat to FY18 revenue guidance
Pleasingly, The A2 Milk Company (A2M) has announced unaudited revenue for FY18 of approximately NZ$922m (up approx. 68% on FY17), which was slightly ahead of its revenue guidance of NZ$900-920m. The full year revenue result implies 4Q18 revenue of NZ$262m, up 63% on the previous corresponding period, growth of 16% on the 3Q18 and a record monthly revenue run-rate of NZ$87.3m per month.
In addition, A2M said it expects EBITDA margin of 30% for FY18 (was 25.7% in FY17A). This implies FY18 EBITDA of approximately NZ$277m, up approximately 96% on FY18. The implied EBITDA guidance was slightly ahead of consensus at NZ$275.3m.
Targeting strong FY19 growth but there will be further investment
In FY19, assuming no material change to trading conditions, A2M expects:
- further revenue growth (Morgans forecasts c40% growth);
- higher marketing expenses as a % of sales (Morgans est. 9.2% in FY18 or NZ$84.5m, increasing to 9.9% or NZ$127.3m in FY19);
- higher overhead costs, due to increasing headcount for China and the corporate office to support the increased size of the company;
- one-off costs associated with the transition of new CEO Jayne Hrdlicka; and
- EBITDA margin to be "broadly consistent"with FY18 or c30% (Morgans FY19F est. was previously 32.3%).
The changes to our FY18 forecasts are immaterial, but we have reduced our FY19 and FY20 NPAT forecasts by 6.9% due to additional investment in the business. We highlight however, that we continue to forecast strong NPAT growth in FY19 of 40.6% and a further 29.8% in FY20.
We expect A2M to benefit from increased market share in all regions, new distribution agreements and incremental growth from new regions and new products (a2 Platinum pregnancy formula and a2 Milk powder blended with manuka honey).
Slightly exceeding the top-end of its FY18 revenue guidance, which implies a record monthly sales run-rate, and expecting to deliver strong EBITDA growth is a credible outcome in our view. We also expect that strong cashflow conversion and balance sheet strength will be a feature of the FY18 result.
We forecast A2M to end FY18 with net cash of A$262m (36 cents per share), and we expect the Board to announce some form of capital management. We are also looking for an update on investing in a blending and canning facility in Australia.
Although expectations for FY19 have been softened due to increased investment across the business, we view investing heavily in the brand as extremely important for its medium to longer-term growth profile.
We retain our Add recommendation.
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