A2 Milk results set the stage for further growth

Peter Garnry

Head of Equity Strategy

On May 31, 2018, we issued a buy recommendation on a2 Milk, a fast-growing New Zealand dairy company, with a price target of AUD 15 against a market price at the time of AUD 9.93. Yesterday, the company released its FY'18 (ending June 30) results, showing 68% revenue growth and an EBITDA margin expanding to 30.7% up from 26.2% in FY'17. Free cash flow increased to AUD 228.6 million translating into a 2.8% free cash flow yield. This is not aggressive valuation given this is a high growth dairy company with a compelling story, expanding into China and South Korea on top of having zero gross debt on the balance sheet.

We maintain our positive view on the stock based on the FY'18 result.

Management says it anticipates further growth in FY'19 driven by Australia, New Zealand, China. and US markets. The company has a 34.7% return on invested capital against cost of capital at 13.4% translating into a healthy profitability spread for shareholders. A2 Milk will in our view continue to be an attractive long-term growth story in Asia in an interesting product category. The infant formula segment in particular is expected to grow quickly in China.

A2 Milk continues to have a high score in our Equity Radar model (+0.47) driven by very high quality (return on capital), zero leverage on the balance sheet, and very high momentum.

The risks are a stronger AUD, a weaker Chinese economy, research showing little healthy effects from a2 proteins in a2 milk, and lower operating margins from increased competition.
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A2 Milk weekly share price since IPO (source: Saxo Bank)

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