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A2 Milk raises a glass to strong start

Lex Hall with AAP  |  20 Nov 2018Text size  Decrease  Increase  |  
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The A2 Milk Company is off to a FY19 flier, lifting its earnings for the first four months of the year while appearing unfazed by the prospect of higher marketing costs, and the impact of China's new cross-border e-commerce laws.

The expanding dairy and infant formula producer lifted net profit by 64.5 per cent to $NZ86 million ($80.62 million) between July and October while revenues rose 40.5 per cent to $NZ368.4 million.

Shares in A2 lifted by as much as 7 per cent in early trade, and were up 2.04 per cent to $10.00 at 11am Sydney time on Tuesday.

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The A2 Milk Company more than doubled its full-year profit in FY18

Chief executive Jayne Hrdlicka is sticking by the company's previous guidance for this financial year of more moderate revenue growth while underlying earnings are expected to be broadly in line with last year.

The New Zealand-based company's expansion into China and the US is set to increase A2's marketing costs, but its increasing share of the Australian fresh milk market, as well as further growth for its flagship A2 Platinum infant formula, is fuelling a positive outlook.

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"We have a strong brand, special culture and unique proposition, the combination of which positions us very well for the future," Hrdlicka said in a speech to be delivered at Tuesday's annual general meeting in Melbourne.

"We are not concerned about the current regulatory dynamic in China and elsewhere in the world."

Hrdlicka said A2 and its daigou network had long been anticipating changes to China's domestic and cross-border e-commerce rules, and both were well prepared to adapt and grow with the new regime.

She said the company would also keep its eye on an increased consumer focus on health and wellness - in particular digestive health - and a growing focus on food safety, naturalness and the provenance of food.

The growing middle class in Asia and China was also key, she said.

The company more than doubled its full-year profit in FY18 to $NZ195.7 thanks to continued strong demand for its baby formula in Australia and China.

Morningstar last month elevated A2 to its list of global equity best ideas, citing the opportunities for growth in China, and setting a fair value estimate of $13.30

Morningstar director of equity research for Australia and New Zealand, applauded the result, saying it was largely in line with expectations.

"Overall, the key positives for me in management’s comments are that (a) the firm continues to gain share in China, despite new competition. This is in-line with our expectation for about 1 point of market share gain per year for the next 10 years," Fleck said.

"And (b) the new e-commerce regulations are not likely to be a long-term impediment to this success."


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Lex Hall is content editor, Morningstar Australia

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. Lex Hall is content editor with Morningstar Australia

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