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New Zealand’s A2 Milk looks to China and US for growth

New Zealand’s A2 Milk is shifting focus to concentrate on greater growth opportunities in the US, China and other Asian nations, and is quitting the UK market after a challenging seven years.

The dairy company made the announcement as it posted full-year 2019 results on Wednesday that missed analysts’ projections, and flagged slower-than-expected earnings growth for 2020.

A2’s forecast for earnings growth of 28.2 per cent for full-year 2020 was unchanged from the second half of 2019, and sent its shares down 15 per cent to a low of NZ$14.10. The group blamed higher investment in marketing, systems and personnel for the dimmer outlook.

Jayne Hrdlicka, chief executive, said A2 needed to invest to take advantage of growth opportunities in the US and Asia, where it is exploring opportunities in Vietnam, South Korea and Hong Kong.

“Our company has evolved considerably, and the UK opportunity is not of sufficient scale when compared to the significant growth potential in Greater China and the US,” she said.

On Wednesday, A2 reported a 46 per cent increase in earnings before interest, tax, depreciation and amortisation to NZ$413m for the year ended June 2019, as revenue jumped 41.4 per cent to NZ$1.3bn. A2’s UK revenue in the period was NZ$21.6m while UK ebitda was NZ$4.4m.

“A2’s outlook statement was quite a bit softer than most analysts were expecting, which is the crux of the market reaction,” said Oyvinn Rimer, director at Harbour Asset Management. The decision to exit the UK was not surprising, he added, as the British premium milk market was nowhere near as developed as in Australia or China.

Last year, A2 surpassed Auckland International Airport as New Zealand’s most valuable listed company. Its market capitalisation of almost NZ$12bn is also higher than that of domestic rival Fonterra, the world’s largest milk exporter.

A2 produces liquid milk, infant formula and milk powders that contain only A2 beta casein protein, which the company claims has greater digestive benefits than milk that also contains A1 protein.

The dairy company has enjoyed strong growth over the past 12 months, with sales of infant formula topping NZ$1bn for the first time. In China it generated NZ$405.7m in revenues in the 2019 year, and has 6.4 per cent of the infant formula market in tier 1 cities.

A2 is facing increased competition in China, where Swiss group Nestlé recently launched its own A2 protein formula. But analysts say the Kiwi company has built a strong brand.

Adam Fleck, analyst at Morningstar, said A2 was on track to hit 15 per cent market share in Chinese infant formula within a decade.

“We forecast solid 15 per cent annual earnings growth over the next 10 years, justifying the lofty 34.1 price/forward earnings multiple our valuation implies,” he said.

Source The Financial Times

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