A2 Milk jumps on FY22 profit and stock buyback

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Infant formula producer a2 Dairy [ASX:A2M] published ‘strong double-digit growth‘ for FY22 and announced a NZ$150 million share buyback.

A2M said its performance for FY22 was in line with its expectations set out in February 2022, driven by the ‘updated growth strategy and improved execution‘.

Shares of A2M rose 9% on Monday, thwarting the broader market sell-off.

After hitting $4 in June, a2 Milk stock has gained 33%.

That said, infant formula stock is still down 8% over the past 12 months:

www.tradingview.com

A2 presents financial highlights for fiscal year 22

Here are A2M’s FY22 financial highlights:

  • “Revenue growth of 19.8% to NZ$1,446.2m…with 2H22 up 18.9% from 1H22
    • Sales of the Chinese label and the English label IMF up 12.2% and 11.6% respectively
    • ANZ and USA fluid milk sales up 1.8% and 30.2% respectively
  • “Earnings before interest, tax, depreciation and amortization (EBITDA) up 59.0% to NZ$196.2 million
  • EBITDA on trading margin increased to 13.6% from 10.2% in FY21
  • ‘Net profit after tax (NPAT) including amounts attributable to non-controlling interests up 42.3% to NZ$114.7 million, of which NZ$122.6 million attributable to company owners
  • “Strong balance sheet with net cash at closing of NZ$816.5 million”

ASX: A2M revenue

Source: Milk A2

A2M said it has resolved some of its recent inventory issues, getting rid of excess inventory, with “channel inventory at target levels.”

Some of the key operational highlights included new company brand awareness records in China, with a 36.3% increase in marketing investment.

A new IMF label for Chinese baby stores was launched, and “record” market share targets were also achieved during the year in Australia and the United States.

A2 successfully acquired Mataura Valley Milk alongside Chinese business partners and began production of its a2 milk powder line.

A2’s gross margin percentage of 46.0% increased 3.7 points, reflecting “previous year’s stock writedowns, price increases, reduced commercial expenses and favorable foreign exchange rates with some offsetting impacts caused by COVID-19.

David Bortolussi, CEO of A2 Milk, said:

It was a successful year for the a2 Milk Company, returning to double-digit revenue and profit growth despite significant headwinds.

We are pleased with the progress made in stabilizing the business, refreshing our strategy and improving our execution.

Our significant increase in marketing investments resulted in further gains in brand health metrics and record market shares, driving strong growth in our infant formula business in China..”

ASX: 2022 A2M Revenue Forecast Chart

Source: Milk A2

A2 returns cash to shareholders

First thing Monday morning, the dairy company announced plans to buy back up to NZ$150 million of its shares through a market buy-back programme.

Approximately 37,180,621 A2 shares are to be redeemed by the end of September, at market price, over a twelve-month period.

A2M believes that a share buyback is “the most appropriate form of capital management today”.

Given Monday’s strong reaction, the market seems to agree.

Although I wonder if a NZ$150 million buyout is really the most appropriate form of capital management at the present time.

For example, A2M’s CEO said the company’s “significant increase in marketing investment” has helped improve brand health.

Hypothetically, would an additional NZ$150 million bring even more brand awareness – added value as infant formula competition increases?

Or does the company feel its advertising spend is decreasing in terms of effectiveness?

Outlook for A2 shares

A2 said its outlook for FY23 is “positive.”

The infant formula company expects revenue and profit growth to continue next year, saying it is “on track to deliver on its medium-term ambitions”.

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Cheers,

Kiryll Prakapenka

For silver morning

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