Defiant a2 Milk finally creams it

Company News

by Glenn Dyer

At last some good news from the a2 Milk (ASX:A2M) company which revealed a Monday trifecta – it did better in 2021-22 than previously forecast, is now forecasting a stronger new financial year, and has also thrown in a share buyback to reward long-suffering shareholders.

Despite the news coming on a day when the wider market slumped, the company’s shares jumped 10% to $5.40 – their highest level since March this year.

Helping that performance was an upbeat outlook for the 2022-23 financial year, even if it contained news of higher marketing and other spending, which has usually been a ’no-no’ from the company in the eyes of investors.

a2 Milk expects the coming year to be solid with single digit revenue growth, especially with expectations for “significant growth” in the variable Chinese market in the current December half.

a2 Milk has battled the impact of Covid on its corporate “daigou” reseller channel in China made it all but impossible at times for people to ship milk products and sell to Chinese consumers.

Blackmores and other Australian companies in dairy and lifestyle products faced similar obstacles.

To combat these problems a2 has lifted its marketing spend (a move that usually worries investors who hate companies spending more on services like advertising and other selling activities).

And it made it clear on Monday that extra spending will continue in 2022-23, a decision that will again put pressure on all the nervous nellies among investors.

A2 said in its report to the ASX and NZX on Monday:

“FY23 gross margin percentage is expected to be broadly in line with FY22, with cost of goods sold headwinds related to increasing milk, ingredient and packaging costs offset by price increases, mix benefits and cost mitigation initiatives.

The Company will continue to increase its brand investment in FY23. Marketing spend will be skewed marginally towards 1H23 with a significant uplift versus 1H22 due to campaign timing.

A further uplift in Administration & Other expenses is expected, reflecting additional capability build, upweighted investment in science, innovation and sustainability, and inflation impacts.

“Overall, the Company is expecting EBITDA growth in FY23 and a modest improvement in EBITDA margin (% of sales). With the marketing plan weighted to 1H23, the Company expects a slightly higher EBITDA margin in 2H23 versus 1H23.

a2 reported a net profit of $NZ122.6 million for the year to June 30 – up 50% from the $NZ80.7 million reported a year ago.

With full-year results coming in line with its forecast and with a self-described “strong” balance sheet, a2 revealed an on-market share buy-back of up to $NZ150 million.

a2 Milk’s China & Other Asia business – its major money-making segment – recorded a revenue of $NZ726.5 million for the year, an increase of nearly a quarter from a year ago. That drove a near 20% jump in total revenue to more than $NZ1.4 billion for 2021-22.

US sales rose 20% to $NZ83 million but sales in the core Australia and NZ markets dropped 5.8% for the year to $NZ533 million, meaning China and Asia are now the company’s main sales areas.

Cash flow surged and the company ended the year with $NZ817 million in its bank accounts and short-term investments.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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