The A2 Milk Company – Building a sustainable growth company

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
13 July 2018, 9:32 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel

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).

Investment view

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.

More information

Morgans clients can login to view our detailed report and share price target for The A2 Milk Company (A2M). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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