Where next as a2 Milk share price dives following FY20 results

Even though a2 Milk reported strong top and bottom-line growth, the stock was still bid lower following the release of its FY20 report.

A2 Milk share price falls following full-year release

Market darling a2 Milk (A2M) saw its share price fall ~6% a little before noon after releasing a strong set of full-year (FY20) results, on Wednesday, 19 August.

Overall, the company reported impressive double digit growth across the top and bottom line, with Chinese infant formula sales almost doubling during the year.

In spite of these robust results, with the a2 Milk share price running up close to 40% YTD in the lead up to today’s results release, the modest sell-off is not the most surprising development. At the time of writing A2M was down around 6%, at $18.32 per share.

FY20 results at a glance

A2 Milk today revealed yet another year of strong growth, bolstered by the coronavirus pandemic and favourable currency movements.

On the top-line, the company reported total FY20 revenue of NZ$1.73 billion representing an increase of 32.8%. A2M’s infant nutrition segment continued to drive the majority of this growth – accounting for NZ$1.42 billion of total revenue.

Positively, management noted that sales were particularly strong in the third quarter – driven by pantry stocking – through online and reseller channels. In saying that, it was noted that pantry stocking activity unwound towards the final quarter of fiscal 2020, with the company noting that it would be closely monitoring consumer behaviour.

On the bottom-line, the company delivered comparably impressive growth: earnings (EBITDA) came in 32.9% higher at NZ$549 million, EBITDA margins at 31.7%, and profits (NPAT) came in at NZ$385,8 million, up 34.1%.

In step with those results, for the full-year marketing investment came in at $194.3 million, as the company focuses on expanding its reach in China and the United States, which are both considered key growth markets.

Mind you, this increased marketing spend looks to be paying off: A2M saw its China label infant nutrition sales almost double in FY20, coming in at NZ$337.7 million. Comparatively, US milk revenue grew 91.2%.

Finally, the company continues to tout an iron-clad balance sheet – with a cash position totalling NZ$854.2 million. This lofty cash position – noted the company – is important for both future growth priorities and manufacturing initiatives. Specifically, management noted that they were currently reassessing the company’s capital requirements, through a review of the company’s capital allocation framework.

Such a move, has been attributed to ‘the increasing scale of our infant nutrition business, we consider it now appropriate to assess participating in manufacturing capacity and capability to complement out existing supply chain relationships.'

The company has guided for FY21 CAPEX to come in at $50 million.

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Where next? The FY21 outlook

Looking forward, in fiscal 2021, the company, while not quantifying an exact figure, guided for strong revenue growth, which would be 'supported by our continued investment in marketing and organisational capacity.'

On the bottom-line, A2M guided for a FY20 earnings (EBITDA) margin of between 30-31%.

Over the medium-term, management said they will continue to target EBITDA margins of approximately 30%.

In response to today's release, analysts from Macquarie retained their Outperform rating and $21.25 price target on the stock, arguing there was is a 'continued runway for existing and new products/markets.'


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