The A2 Milk Company Ltd (ASX: A2M) share price is in focus today as the infant formula business announced its FY23 half-year result.
Two of the company’s main product offerings include infant formula and liquid milk.
FY23 half-year result
Here are some of the main highlights from the company’s result:
- Total revenue rose 18.6% to $783.3 million
- China and other Asian revenue rose 54%
- ANZ sales fell 24.6%
- USA sales increased 61.8%
- Infant formula sales up 18%, China label sales up 43.5% and English label sales up 1%
- EBITDA (EBITDA explained) rose 10.5% to $107.8 million
- Profit / earnings per share (EPS) up by 24% to 10 cents per share
A2 Milk pointed out that it delivered the total 18% growth of infant formula sales despite the Chinese infant formula market falling 12.5%. It put this growth down to an increase of its market share in China.
The company said that its China brand health reached new highs driven by increased investment and higher impact marketing campaigns, while innovation “continues to ramp up with recent product launches in all categories supporting growth.”
A2 Milk’s English label infant formula market share improved in cross-border e-commerce and daigou channels.
Good balance sheet
The business said that it has a “strong” balance sheet with net cash (cash mins debt) of $707.2 million. This high level of cash allowed the business to start its on-market share buyback of up to $150 million – it’s 60.1% complete.
Outlook
A2 Milk said that its outlook for FY23 revenue growth of “low double-digit” and the EBITDA margin is “similar to FY22”. The gross profit margin is expected to be “slightly higher”, but costs are rising as well, such as increasing milk, ingredient and packaging costs. EBITDA growth is expected in FY23.
This guidance is consistent with the prior update at the company’s annual meeting.
But, A2 Milk noted that the increasingly challenging China infant formula market dynamics to continue due to fewer births in 2022 and the rolling impact from fewer births in prior years on later-stage infant formula products.
It also noted that operating cash conversion is expected to be significantly lower in FY23 than FY22 because of the reversal of working capital timing benefits in FY22 and an increase in working capital related to the transition of Chinese label infant formula products.
Final thoughts on the A2 Milk share price
The A2 Milk share price has dropped 5% in early trading, so the market didn’t seem to like what the company reported.
But, keep in mind that it has risen around 40% over the last six months. It was actually at the current price last week.
I think A2 Milk is doing well, but I think the share price rebound reflects the current improvement in financials. For me, I’d call A2 Milk a ‘hold’. If it were to plunge it could be a buy again, but I think the Chinese growth story for infant formula is a lot less appealing than it was a decade ago.
