Booming demand for infant formula in China is expected to continue to bolster the earnings of trans-Tasman dairy company a2 Milk in the next six months, after sales of its Platinum formula brand catapulted it deeper into profitability.
a2 Milk Company chief executive Geoff Babidge expects infant formula will soon make up more than 60 per cent of the company's overall revenue. Photo: Louise Kennerley
Infant formula now accounts for 53 per cent of a2's overall revenue, which surged 86 per cent in the six months to December 31 to $NZ139.1 million ($128.5 million).
The upgrade cycle doesn't appear to be over for these infant formula companies.
Belinda Moore, Morgans analystChief executive Geoff Babidge expects formula to continue dominate its product portfolio and soon account for more than 60 per cent of the company's overall revenue.
"We are still going to have a portfolio of products but clearly, the forecasts and growth projections that we have ... in the not too distant future of infant will be beyond 60 per cent [of revenue] and heading further north," he said.
Advertisement
"Then there is opportunity for us to take infant into new markets."
a2 Platinum sales soared 340 per cent to $NZ73.9 million in the six months to December 31. This helped push the company's overall net profit to $NZ10.1 million, compared with $NZ125,000 the year before.
Mr Babidge said that momentum is expected to continue in the second half of 2016. He expects full-year revenue to be up to $NZ350 million ��� a 125 per cent lift on 2015.
The company's shares opened 20 per cent stronger before losing steam to trade only 3 per cent higher in the afternoon session.
Morgans analyst Belinda Moore said it seemed "people were taking profits after a great result, sadly, in a volatile market".
It was expected a2 would deliver stronger financial performance. Its share price had rallied about 10 per cent in the lead-up to its announcement.
Regulatory changes
Ms Moore said there was some concern about China slowing the grey market for infant formula, which has been lucrative for a2 and seen tins of its Platinum product sold out in Australian supermarkets.
Such regulatory changes, she said, could include requiring all infant formula sold on Chinese e-commerce sites to be in Chinese packaging.
"But this is a2's third profit upgrade this financial year and it does include some regulatory changes in China. Who's to say this [latest] guidance is not still conservative? It's a big market.
"The upgrade cycle doesn't appear to be over for these infant formula companies."
Mr Babidge said a2 was "well placed" to combat any changes in Chinese regulation. He said it had sealed cross-border arrangements through e-commerce companies such as JD.com and grown its sales force and distribution chain in China, which lessened the company's reliance on the grey market.
Mr Babidge was also confident Synlait, which produces all of its infant formula in New Zealand, could help meet domestic and Chinese demand for the product.
"We are confident they can build and grow with us."
That said, he said the company was exploring similar production contracts with Australian companies to complement the Synlait agreement.
Elsewhere, a2 spent $NZ8.1 million on growing its business in the US and Britain in the six months to December 31. The majority of that spend was in the United States and related mainly to liquid milk, where it is stocked in about 85 per cent of Californian grocers.
It will spend $US3 million ($4.2 million) in the next six months on marketing and advertising its products in the US. Mr Babidge said it was still targeting California but would eventually introduce its products more states towards the east coast.
a2 will not pay a half-year dividend.