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A2 Milk Says Lift in Dairy Prices May Impact FY2020

03 April 2019

NEW ZEALAND - A2 Milk Company said recent increases in dairy pricing will have an impact on gross margin percentages in the 2020 financial year but it doesn't anticipate any significant impact this year.

Dairy product prices rose for the ninth straight time in the overnight Global Dairy Trade auction. The GDT price index added 0.8 percent from the previous auction two weeks ago and average prices are now up 28 percent since the auction on 20 November.

"We do not anticipate any significant impact to gross margin percentage during FY19 as a result of recent increases in dairy pricing as reflected in Global Dairy Trade Indices. However, these increases are likely to have some impact in FY20," A2 said in a presentation for investors in Sydney published on the stock exchange. Its financial year runs to 30 June. Gross margin in the first half of the current financial year was 55.6 percent.

A2 Milk reiterated that it expects the group revenue growth rate in the second half to continue broadly in line with the first but second-half earnings before interest, tax, depreciation and amortisation margins will be lower. Full-year ebitda as a percentage of sales will be 31 to 32 percent due to marketing investment, investment in organisational capability and the weaker Australian dollar versus the kiwi dollar.

Revenue lifted 41 percent on the year in the first half to $613.1 million while ebitda was up 53 percent at $218.4 million.

Regarding the third quarter, A2 said its marketing programme is on track in China and it continues to strengthen its infant formula market share position. In Australia and New Zealand, it reiterated that it has not experienced any impact to infant formula sales from new e-commerce or cross border e-commerce regulations in China. In the US it cited "continuing positive momentum" in sales velocities and distribution growth for liquid milk.

First NZ Capital search analyst Tristan Joll said A2 has done "an excellent job of creating and managing demand for its A1 protein-free dairy products. The outcome is a business which has passed-through $1 billion in revenue with free cash flow that can support growth, upstream investment and potential capital returns. In our view, the outlook for the balance of full-year 2019 continues this momentum on."

He rates the stock at neutral but lifted his 12-month target price to $14 in a note published Wednesday. The stock last traded $14.58 and is up 31 percent so far this year.

"Given the stock is trading at 12 percent above FNZC's revised spot discounted cash flow or DCF and on 30 times forward earnings per share "we view the stock as a more balanced investment proposition," said Mr Joll.

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