UPDATE: A2 shares soar to record after earnings upgrade

UPDATED: Shares of A2 Milk Co [NZX: ATM] soared to a record after the milk marketer raised its annual earnings forecast on strong demand for its a2 Platinum-branded infant formula.

This has given investors’ confidence in its ability to diversify its range of products and expand into more markets.

Operating earnings before interest, tax, depreciation and amortisation are expected to rise to between $33 million and $37 million in the year ending June 30, 2016, ahead of its November forecast of $22 million and year-earlier ebitda of $4 million, the company says.

Annual revenue is forecast to rise to between $300 million and $315 million, ahead of the November forecast of $285 million and from $154 million in 2015.

A2’s shares surged 27% to $1.41, and earlier touched a record $1.42. Ahead of today's gain the shares had jumped 91% this year, making them the best performer on the S&P/NZX50 benchmark index.

Shares in Synlait, which manufactures the infant formula on behalf of A2, are also trading up 5.5% to $3.05.

A2, which markets milk with a protein variant said to have health benefits, raised $40 million in a discounted share placement in October to help boost growth of infant formula sales in China, Australia and New Zealand.

The company aims to expand by widening its offering from fresh milk into a wider range of products such as infant formula, whole milk powder and icecream.

It is also planning on spreading its geographic reach into global markets including Australia, China, and the US and UK.

"The brand had gained a lot of following and recognition in the fresh milk space, however it's only over the past 18 months to two years that they have pushed into infant formula," Nikko Asset Management New Zealand analyst Michael De Cesare says. The company holds the stock among its $400 million of New Zealand equities.

"The market has been maybe somewhat conservative in giving them the credit in terms of where the infant formula share might get to and the earnings they might derive from those achievements,” he says.  

“The upgrade is providing more evidence the market share outcome is going to be larger than the market initially thought and giving a bit more credit for the growth potential in terms of where that final mature market share might end up," Mr De Cesare says.

Nikko bought the stock to help fund the company's growth as part of the recent equity raising and Mr De Cesare says the next hurdle for a2 is to prove it can gain traction in markets outside the Asia-Pacific region.

"The upside from here will probably be going deeper in to Australia, which these upgrades highlighted, but also their offshore strategies are gaining traction as well – they are currently targeting the US, UK and China."

While a2 cited demand for its infant formula in Australia as the reason for today's earnings upgrade, some of that product was also being sold into China by a third-party supplier, Mr De Cesare says.

"The jury was out as to whether it could be leveraged to other markets and maybe now we are seeing the signs that actually China, probably the largest infant formula market in the world, is keen on the product and it has got strength in to that market so we are very pleased in that regard.

“The next actual step change could be the US and the UK. If that was to occur then the future continues to look bright for these guys," he says.

A2 managing director Geoffrey Babidge says the company has recently increased the supply of a2 Platinum infant formula to its customers, however, it continues to experience a level of “out of stocks” on shelf.

"The strong trading performance provides further evidence of the increasing appeal of the a2 Platinum brand in Australia and China and the growth potential in additional markets in the future," Mr Babidge says.

(BusinessDesk)