UPDATE: A2 shares lift 8.6% on strong first half result

(Recasts and updates with stock price, Fonterra announcement, broker comment and detail throughout)

By Rebecca Howard

Feb. 20 (BusinessDesk) - A2 Milk's stock jumped 8.6 percent after it said first-half profit climbed 55 percent as the milk marketer continued to expand market share in China despite trade tensions between the US and China crimping consumer spending.

Net profit rose to $152.7 million in the six months ended Dec. 31 from $98.5 million a year earlier as sales climbed 41 percent to $613.1 million, Auckland-based, Sydney-headquartered a2 said. The result blitzed broker expectations.

The stock recently traded at $13.97 and is up 15.4 percent so far this year.

Sales of infant formula totalled $495.5 million for the half – an increase of 45.3 percent on the prior year driven by share gains in China and Australia.

A2 Milk said Kantar Infant Formula market tracking of large Chinese cities showed its infant formula consumption value share increased to 5.7 percent in the 12 months ended Dec. 28 versus 4.4 percent in the prior period. It also said its market share position in lower tier cities in China was also rising.

Sales growth was also strong in its liquid milk and milk powder segments. The liquid milk business saw growth of 20.2 percent to $83.4 million.

Milk sales growth in the US alone was up 114 percent, underpinned by increased investment in brand awareness and a stronger distribution base. At the end of January, US distribution was around 12,400 stores. Sales of other nutritional products lifted 40.4 percent to $34.3 million.

A2's earnings before interest, tax, depreciation and amortisation were $218.4 million, up 52.7 percent.

"The result was well ahead of any analyst forecasts," said Grant Williamson, a director at Hamilton Hindin Greene in Christchurch. Forsyth Barr had expected ebitda of $205 million while First NZ Capital had tipped it to be $196 million.

Looking ahead, a2 said it expects the group revenue growth rate in the second half to continue broadly in line with the first half. “Increased investment in brand-building in 2H19 is expected to support revenue growth in FY20 and beyond,” it said.

"Following a very strong first half performance, and encouraged by growing market share in China, the company is now in a position to reinvest the benefits of scale into increased marketing activities in the second half," it said.

As a result, second-half ebitda margins will be lower than in the first half, with full-year ebitda as a percentage of sales expected to be approximately 31-to-32 percent, it said. Ebitda as a percentage of sales was 35.6 percent in the first half.

Meanwhile, Fonterra Cooperative Group announced it is signing up farms to supply a2 in the 2019/20 season.

Units in the Fonterra Shareholders' Fund were up 0.2 percent at $4.63, having fallen 0.4 percent since the beginning of the year.

Fonterra and a2 Milk announced a strategic relationship a year ago under which Fonterra would source an A2 milk pool, which comes from herds with cows that produce milk containing only the A2 beta-casein protein. Some consumers are willing to pay more for the milk as they believe it prevents the digestive problems they say they experience when drinking A1 milk.

Earlier this month, Livestock Improvement Corp, the dairy herd genetics cooperative, more than doubled its first half net profit as an emerging "no bull trend" gains traction and more farmers turn to artificial breeding to develop A2 herds.

Today, Fonterra said the co-op’s initial milk pool will be based in the Waikato around its Hautapu site and will support the production of ingredients. It is anticipated around 100 farms will be needed for next season.

Most of the value from the relationship with a2 Milk will be returned to all cooperative farmers through the dividend. Participating farms will also receive a premium for their milk, it said.

(BusinessDesk)

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