The A2 Milk Company Ltd (ASX: A2M) share price will be on watch on Wednesday after the infant formula and dairy company released its full-year results.
For the 12 months ended June 30, a2 Milk reported total revenue of NZ$922.7 million and a net profit after tax of NZ$195.7 million. This was an increase of 68% and 116%, respectively, on the prior corresponding period. This led to earnings per share of 27 NZ cents (24.54 Australian cents).
Earnings before interest, tax, depreciation and amortisation (EBITDA) came in at NZ$283 million, up 101% on FY 2017's result. This meant the company finished the year with an EBITDA to sales ratio of 31%, which was slightly higher than management's guidance of 30% in July and up from 26% a year earlier. Due to increased spending on marketing over the next 12 months, this margin is expected to remain steady in FY 2019.
The key driver of growth was its a2 Platinum infant formula range once again. Sales grew substantially in Australia and China, with the company continuing to grow its market share in both markets. Its infant formula share strengthened to 5.1% in China and 32% in Australia. This led to a2 Platinum sales revenue rising 84% to $724.2 million.
These market share gains underpinned the growth of its ANZ business, which saw total revenue rise 49% to NZ$656.6 million and EBITDA increase 69% to NZ$262.2 million. The China and Other Asia business continued to record even quicker growth, with revenue up 163% to NZ$233.6 million and EBITDA up 148% to NZ$81.3 million.
Contributing to this growth was its a2 Milk branded fresh milk. Its value share also grew strongly in Australia and is now up to 9.8% from 9.3% a year earlier. Pleasingly, progress is being made in the United States and the United Kingdom. According to management, the U.S. business continued to grow sales velocities in key accounts, alongside a distribution footprint which increased to 6,000 stores. In the United Kingdom, improvements in rates of sale and expanding distribution brought gains in revenue. Neither market makes a meaningful contribution to its overall sales yet, but that could change in time.
Outlook.
With the company's Australian and China businesses delivering strong earnings, an expanded US distribution footprint, and the growing strength of its brand, management believes the company is well positioned to execute its strategy for further growth.
This includes building a branded portfolio of dairy-based nutritional products based on the A1 protein free proposition, investing in attractive markets where it believes the company can build competitive brand strength, and deepening its proprietary know-how and A2 protein expertise.
Pleasingly, although competition has increased with the entry of a major competitor in the A1 protein free category, the company notes that there has been no apparent impact on its sales momentum. It expects competition to continue to increase but remains confident that its strong brand and absolute focus on A1 protein free products will actually allow it to benefit from category expansion.
No real guidance was provided for FY 2019, other than the company anticipating "further growth in revenue particularly in respect of nutritional products in ANZ and China, and liquid milk in the United States."
Should you invest?
Based on this result a2 Milk's shares are currently changing hands at 41x earnings. Whilst this is expensive compared to the market average, I feel it is more than fair for a company growing earnings at such a strong rate. The lack of any real guidance is a bit disappointing, but I remain confident that FY 2019 will be another year of bumper profit growth.
Because of this, I think it would be a great investment option along with rival Bellamy's Australia Ltd (ASX: BAL), especially after recent pullbacks in their respective share prices.
