A2 Milk share price skyrockets 18.3% on strong first-half outlook

Right now the outlook looks positive for a2 Milk (A2M), as the company offered deeper insight into H1 FY20 margins and revenue as part of its AGM.

Are the bulls back?

By 9:36:04 AM New Zealand time, the a2 Milk share price had skyrocketed as much as 18.3% – to NZ$15.15 per share – after revealing that it expected stronger margins than previously communicated and a healthy growth outlook in the first-half of FY20.

A depressed share price likely helped matters as well as a potential short squeeze. Prior to today’s update, around 6% of the company’s stock was held short.

Practise trading a2 Milk and other growth stocks with an IG demo account now

A2 Milk share price: momentum remains

Analysts – and as a consequence, investors – were worried just how much revenue growth would cost a2 Milk (ASX: A2M) going forward. The other worry: a2 Milk’s days as a growth powerhouse may be over, as competition intensifies. Margins were after all, flagged as potentially lower for FY20.

Yet as the company was keen to demonstrate as part of today’s AGM materials: momentum remains.

A2M also took the chance to reiterate the strength of its headline FY19 figures. Here, a2 Milk commented that it brought in FY19 Group revenues of NZ$1,304m, earnings (EBITDA) of NZ$413m and earnings per share (EPS) of 39.3 cents.

Framing those results against FY20 expectations, the company noted that it expected first-half group revenue of between NZ$780m and NZ$800m. These estimates, said the company, is a result of the A2M's increased brand awareness and marketing spend.

Taking a more granular view, A2M provided a more detailed breakdown of expectations for individual parts of the Group in H1 FY20.

US sales – though still representing only a small portion of group revenue – is expected to hit NZ$27m – implying a growth rate of 110%.

'Chinese label infant nutrition sales forecast to be approximately [NZ]$135 million representing a growth rate of ~84%.'

Cross border e-commerce sales, by comparison, are forecast in the range of NZ$155 million – implying a growth rate of 54%.

Finally, ANZ English label infant nutrition sales also remain stable and is expected to reach NZ$350m in H1 FY20.

Maybe a2M's price-to-earnings ratio of 31.98 is justified.

The elephant in the analyst’s room

The potential for weaker margins was a sticking point for analysts, triggering a wave of relatively negative wave broker reports. Today’s update potentially goes a ways to ease such concerns.

Specifically, today it was pointed out that:

'As an outcome of strategic gross margin focus, full year EBITDA margin % is now anticipated to be stronger than previously communicated and in the range of 29-30%.'

The company noted that this more favourable outlook was the result of improved price yield and a reduction in the cost of goods sold.

In saying this, the company did note that first-half EBITDA is expected in the range of 31-32% – higher than the full-year range.

Other details to consider

The company also today announced that it had extended its manufacturing and supply agreement with Synlait, until at least July 31, 2025.

On the ASX, the a2 Milk (ASX: A2M) share price currently trades at $13.88 – still a ways off its 52-week high of $17.3 per share.


The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

Seize a share opportunity today

Go long or short on thousands of international stocks.

  • Increase your market exposure with leverage
  • Get spreads from just 0.1% on major global shares
  • Trade CFDs straight into order books with direct market access

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Bid
Offer
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Bid
Offer
Updated
Change
Bid
Offer
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.