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.

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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.

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