A2 Milk share price climbs on strong interim results

Investors bid a2 Milk’s stock higher in the opening hour of trade, after the company revealed stronger than expected H1 margins, as well as good revenue and earnings growth.

One of the key sources of volatility around a2 Milk’s (ASX: A2M) share price over the last eight or so months have been questions surrounding the company's margins.

These concerns were kick-started by an aggressive marketing plan, potentially compounded by a C-suite shake-up, but became somewhat subdued after the company stressed the need to balance growth against strategy.

Ultimately, today's FY20 interim results will likely go a long way to boost the market's confidence in A2's management.

Here, the company delivered growth across all of its key financial metrics: revenue rose, earnings jumped, and the company continues to boast a strong cash position. Citi noted that earnings (NPAT) exceeded their previous expectations and that A2’s H1 margins were ahead of guidance.

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Unsurprisingly, investors responded bullishly at the open, bidding the stock up over 8% in the first hour of trade on the ASX.

On the top-line, A2M posted H1 revenues of NZ$806.7 million (+31.6%); against earnings (EBITDA) of NZ$263.2 million (+20.5%).

On the bottom-line, the company posted profits (NPAT) of NZ$184.9 million, representing an increase of 21.1%.

Yet maybe most importantly, the company revealed that EBITDA margins came in 'better than expected', at 32.6%. The company has previously guided for H1 margins in the range of 31-32%.

A2 also continues to tout a strong balance sheet: carrying no debt and currently holding NZ$618.4 million in cash.

'We are pleased with the results of our strategy execution and continue to be energised about our key products, core markets and growth outlook,’ said management.

Commenting on arguably the company's most important market, it was further noted that:

'In Greater China, we remain focused on strengthening our infant nutrition position in-market. It is pleasing to see our investments in brand, trade activities and people driving strong sales momentum.'

Indeed, the company recorded strong growth from its Chinese infant nutrition products during the half, 'with sales doubling to $146.7 million and distribution expanded to 18,300 stores.'

A2 Milk share price: where next following half-year results

Given A2’s significant exposure and reliance on the Chinese market, the potential impact of the Coronavirus crisis is something investors have likely been eager to gain additional visibility on. Positively then, A2 has today confirmed theories amongst a number of analysts, noting that the Coronavirus has actually had a positive impact on the company in the first two months of the second-half.

Here the company said:

'Given the essential nature of our products for many Chinese families, demand is strong, particularly through online and reseller channels, with revenue from the first two months of 2H20 above expectations.'

The company did however note that because the Coronavirus situation is highly dynamic, ‘at this stage we are unable to quantify the impact, either positively or negatively, for the full year.'

Finally, A2 has maintained its previously stated FY20 EBITDA margin guidance of between 29-30%.

Analyst musings

Citi analysts today were quick to point out that A2’s ‘FY20 outlook looks conservative [and] as we expected, the coronavirus has led to 2H20 revenue to date being above company expectations.’

Moreover and speaking to the implications of today's results, the broker said 'we see a2 returning to its roots of rewarding investors with consistent earnings upgrades and, while also factoring in upside risk to 2H20, we see the stock likely to react positively. The China outlook also bodes well for Bubs.'

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