A2 Milk Company Ltd (ASX: A2M) reported its result this week. Is the A2 Milk share price a buy after seeing the numbers?
Firstly, I’ll recap what the company reported before giving some thoughts.
A2 Milk FY22 report
The last two and a half years have been very volatile for the infant formula business. Was FY22 a year of recovery?
- Revenue rose by 19.8% to $1.45 billion (or 11.2% excluding MVM)
- EBITDA (EBITDA explained) jumped 59% to $196.2 million thanks to a strong improvement of the margin
- Net profit after tax (NPAT) increased 42.3% to $114.7 million
- Earnings per share (EPS) soared 51.8% to 16.5 cents
Further details
A2 Milk outlined that there was good growth in a number of its segments.
Chinese label infant formula revenue rose 12.2%, while English label infant formula revenue went up 11.6%. USA liquid milk sales increased by 30.2%, while ANZ liquid milk sales went up 1.8%.
The company explained that inventory management actions taken in 2021 to address excess infant formula milk inventory have “proven effective” with channel inventory at target levels and product freshness is “amongst the best” in the industry and market pricing has “improved”.
A2 Milk has made “significant progress” with the implementation of its refreshed growth strategy which focused on capturing the full potential of the Chinese market opportunity, it’s having an impact on brand health metrics and record market share.
Management said the FY22 result was in line with expectations (with double digit revenue growth and earnings growth) even though there were challenging market conditions, thanks to its strategies and improved execution.
Balance sheet and share buyback
A2 Milk finished with closing net cash of $816.5 million.
Due to its improved performance, strong balance sheet and optimistic outlook, the board decided to announce it intends to do a share buyback of up to NZ$150 million.
Management thought a buyback would be the most appropriate form of capital management right now.
Outlook and thoughts on the A2 Milk share price
In FY23, A2 Milk is expecting “high single digit” revenue, with the FY23 first half year on year growth expected to be “significantly higher” than the second half’s growth.
Chinese infant formula sales are expected to be higher in FY23, with significant growth in the first half. However, the second half sales are expected to be impacted by a transition to a new pending GB registration. Management warned that one of the risks for the business was the timing of the State Administration for Market Regulation (SAMR) registration process.
English infant formula sales are expected to be up in FY23.
Australian liquid milk sales in FY23 are expected to be “broadly” in line with FY22 with reduced in-home consumption after lockdowns. USA liquid milk sales are expected to be higher in FY23, along with a significant improvement in EBITDA losses.
The FY23 gross margin percentage is expected to be “broadly in line”, even though costs have increased, offset by higher prices. It’s expecting to spend more on marketing in FY23.
The market seemed to like the result, buyback outlook, with the A2 Milk share price surging 10% yesterday. An outlook of growth is promising, however the registration could be a potential future issue if it doesn’t go to plan.
With China being such a large part of the picture, A2 Milk’s longer-term future is too unpredictable for me. It’s hard to say whether today’s valuation is good value or not. Therefore, I’m happy to leave A2 Milk shares to other investors.
