A2 Milk share price drops 14% even as FY19 profits hit $287 million

A2 Milk missed key earnings (EBITDA) estimates when it reported its FY19 results this morning. The stock was sold-off in response.

FY19 results at a glance

a2 Milk Co Ltd (ASX: A2M) posted another set of highly impressive results with its FY19 release today.

The fresh milk and infant formula maker saw stellar growth across the board: with revenue, earnings and cash flow all continuing to rise in 2019.

Even so, when the NZX opened this morning at roughly 8:00 AEST – a2 Milk’s share price fell as much as 14.78%, to NZ$14.37 per share.

The company's share price fell slightly less when it opened on the ASX, dropping 11.75% as of 10:06 AEST.

Front-line financials march forward

Though the company’s share price fell this morning, a2 Milk Co Ltd’s CEO Jayne Hrdlicka spoke positively of the company’s record-breaking results, noting that revenue was strong across all of the company’s key products and regions.

Indeed, on a fundamental level, all of a2 Milk’s key FY19 financials came in strong.

On the top-line, revenue soared 41.4% to NZ$1,304 million.

Earnings also surged: EBITDA figures bounced 46.1%, while net profits after tax (NPAT) grew even faster, rising 47.0% to NZ$287.9 million.

In saying that, marketing costs did rise as the company aggressively expands. Here, a2 Milk’s marketing spend came in at NZ$135.3 million; an increase of 83.7% from the year prior.

So why the selloff then?

Though a2 Milk’s 2019 results were strong, they undershot analyst estimates in one key area: earnings.

Specifically, a2 Milk’s earnings (EBITDA) came in 2.7% below the average analyst consensus, according to Bloomberg Data.

Before the 2019 results announcement, analysts had been expecting earnings figures of between NZ$400 million and NZ$446 million – the company reported EBITDA of NZ$413.6 million, in comparison.

Such a miss was likely compounded by elevated expectations around the milk company going into the results.

Prior to the release, A2 Milk traded well above the market – with a price to earnings ratio of 47.8; compared to the ASX 200’s price to earnings ratio of 18.

Exiting the UK milk market

In an interesting development, a2 Milk Co Ltd today announced that it has decided to exit the UK liquid milk market, which it has decisively struggled to expand into in recent years.

On this topic, the company’s CEO Jayne Hrdlicka noted that the company is of the opinion that the ‘UK opportunity is not of sufficient scale.’

As such, Ms Hrdlicka further pointed out that, ‘the board has therefore decided to exit UK liquid milk operations during 1H20.’

Quantifying these struggles, and though a2 Milk’s U.K. business has seen some growth, it has been significantly slower going than the company’s other segments – rising just 12.7% in FY19 to A$21.6 million.

This pales in comparison to some of the company’s other markets. In the 2019 full-year for example: the US business segment saw its revenue increase 160%, China grew 73% and even the company’s Australian business – its most mature segment – grew 28.3% to NZ$847.2 million.

A2 Milk currently commands an impressive 6.4% of China’s infant nutrition market.

A2 Milk share price: outlook and opportunities

Even though a2 Milk’s shares were sold off aggressively this morning in New Zealand and Australia, there remains much to like about the infant formula and fresh milk company.

Speaking of the 2020 outlook, CEO Jayne Hrdlicka said:

‘We anticipate continued growth in revenue across our key regions supported by increasing brand and marketing investment in China and the US.’

Ms Hrdlicka continued by saying that:

‘We have also invested heavily in increasing our capability and capacity to support the development and delivery of comprehensive growth plans for our most important strategic priorities.’

In-line with such priorities, the company also anticipates that marketing spend will hit 12% of FY20 revenues – up from the 2019 year.

Going into the FY19 results and according to the Wall Street Journal: a2 Milk Co Ltd had six buy recommendations and three sell recommendations.

Ultimately, and even with the brutal sell-off we saw on the NZX this morning, a2 Milk's share price has still gained a massive 60.43% in the last year.


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