A2 shares fall as investors weigh up funding needs

See also: Strange goings on at A2 Milk

UPDATED: A2 Milk Co [NZX: ATM] shares fell to a three-week low as investors weighed up the company's funding needs after the board turned down a potential offer from cornerstone shareholder Freedom Foods Group and US food and beverage firm Dean Foods.

The shares fell as low as 70 cents in morning trading on the NZX, and were 6.5 percent to 72 cents shortly before midday. A2 today said it told Freedom and Dean Foods the expression of interest wasn't compelling enough to get a board recommendation if a formal bid was made, though was open to talking with the suitors. It has also attracted other potential bidders and is evaluating them.

"What is clear from the trading update, though, is in the absence of corporate interest, they will require new funding," said Matt Goodson, managing director of Salt Funds Management. "Clearly what is affecting the stock is that the bid from Freedom and Dean Foods is not a level that the board's in a position to recommend. I guess for some shareholders this probably rekindles memories of three or four years ago when there was potential corporate interest and in the end it ended up just being an equity raising and sell down from existing shareholders."

The bid by Freedom and Dean Foods emerged last month and was contingent on A2 shelving plans to raise new capital.

The Auckland-based company today said it will fund growth from cash flows in the first instance and has short-term debt facilities in place to support working capital needs.

Managing director Geoff Babidge told BusinessDesk the board looked at raising capital after its listing on the ASX attracted strong interest from institutions keen on investing in the company. Those plans were shelved after the expression of interest from Freedom and Dean Foods, he said.

"We've previously said we have sufficient funding capability in respect of current plans and the trading update today confirms that," Babidge said. "If there are opportunities for us to further turbo-charge growth, that's something to reflect on."

A2 today said earnings before interest, tax, depreciation and amortisation were flat at $4 million in the 12 months ended June 30, and are forecast to rise to $12 million in 2016, ahead of plan. Annual revenue rose 39 percent to $154 million and A2 raised its 2016 sales target to $267 million from a previous forecast of $230 million due to growth in infant formula sales in Australasia and China, new product launches in Australia and New Zealand and the company’s launch into North America.

Babidge said the company reported a "particularly strong second half" and that the uplift in 2016 guidance was largely based on real growth rather than a depreciating currency, although the latter increases the value of export receipts when denominated in local currency.

“The company considers that its budget has been prepared on a prudent basis and could reasonably expect performance to exceed budget projections if current trading conditions and trends in infant formula are sustained throughout the course of FY16,” A2 said in a statement. “The A2 Milk Co continues to perform strongly, ahead of plan, in its core ANZ business, which is delivering significantly increased profits and cash flow.”

A2’s Australia and New Zealand segment accounted for the bulk of earnings in the 2015 year, generating a 58 percent increase in Ebitda to $30 million on a 39 percent gain in sales to $149 million. The region is forecast to post earnings of $40 million in 2016 on sales of $216 million.

Across China and Asia, A2’s sales were flat at $3 million, while it reported an Ebitda loss of $4 million, compared to a loss of $3 million in 2014. The segment is forecast to break even on sales of $13 million in 2016.

The US and UK units doubled sales to $2 million, while trebling the Ebitda loss to $12 million in 2015. The two units are forecast to generate sales of $38 million for an Ebitda loss of $16 million in 2016. A2’s corporate segment reported an Ebitda loss of $10 million in 2015, up from $8 million a year earlier, and expects that to widen to $12 million next year.

Babidge said most of that growth was from the company's expansion into North America.

"There's a pretty significant opportunity in the US - we're looking at reasonable revenue growth, even in the first year of operation in FY16," he said.

A2 said it repositioned its brand into the premium specialty category in the UK and downsized to a one litre package from two litres, which has improved margins. The company plans to introduce UHT milk and infant formula in the short to medium term in the UK.

“Following the changes implemented during FY15, the company is forecasting a reduced funding contribution to the business in FY16,” it said.

Salt Funds' Goodson said some aspects of the trading update were weaker than expected, and others were stronger, but "overall it was fine."

The company will report its annual result in late August.

(BusinessDesk)