a2 Milk CEO and MD Geoff Babidge speaks at the company's AGM held at the Grand Millennium Hotel. / Video by Dean Purcell
A2 Milk has become New Zealand's largest listed company after announcing another bumper profit and the formation of a joint venture with the world's biggest dairy exporter, Fonterra.
The announcements met a wall of buying interest, taking a2 Milk's shares up by $4.25 or to a record $13.75 and giving the company a market capitalisation of $10 billion, well ahead of the next biggest listed company, Auckland Airport ($7.7b).
The rise and rise of a2 Milk continued after the company announced a deal yesterday to supply Fonterra with A1 protein free milk.
At the same time, a2 Milk announced another huge lift in net profit — $98.5 million for the six months to December 31, up 150 per cent on the previous comparable period.
The stock has had a phenomenal run — rallying by $9.31 or 381 per cent since this time last year.
A2 Milk said its revenue shot up by 70 per cent to $434.7m, driven largely by increased demand for its Platinum brand of infant formula, explaining why it needs more milk.
The company's springboard for growth has been the enthusiastic take-up by Australian consumers of its A1 protein free milk, to the point where it now has 9.5 per cent of the Australian fresh milk market, followed by the popularity of its Platinum brand of infant formula.
Chief executive Geoff Babidge said the big lift in profit was driven by a higher proportion of formula sales across the group — it now accounts for 78 per cent of the company's revenue.
We are very satisfied with the relationship that we already have with [supplier] Synlait but we also have to look to the future.
Under the agreement with Fonterra, the co-op would make formula for a2 Milk from 2019 at its Darnum plant in Australia, which Fonterra operates under a 49-51 per cent joint venture with China's Beingmate.
"Our nutritional [infant formula] business is growing extremely rapidly," Babidge said. "We are very satisfied with the relationship that we already have with [supplier] Synlait but we also have to look to the future and to ensure that there is sufficient capacity and capability to supply what appears to be a very strongly growing business in nutritional products," he said.
Babidge said the consumer take-up of a2 milk by New Zealand customers had not been as strong as it had been in Australia, but that could change under the Fonterra deal.
It has clearly surprised most investors and there has been huge buying.
"You can assume that we have looked at a number of different options and have spoken to a variety of people and I am of the view that an arrangement with Fonterra is the optimum model to introduce our brand in a meaningful way, across New Zealand," he said.
Harbour Asset Management senior research analyst Oyvinn Rimer said a2 had delivered on its earnings promises.
"It has clearly surprised most investors and there has been huge buying," he said.
Fonterra's chief operating officer Miles Hurrell said the motivation behind teaming up was that a2 Milk was changing dietary habits.
The incredible rise of a2 Milk as company becomes our biggest
"This is the start of a journey," he said. "It's the announcement of a strategic partnership with the a2 Milk Company, which enables us now to work with our farmers on what they can and can't do on their farms, and marry that up with what the global demand is for a range of products," he said.
"We will be looking to see what we can do in terms of matching supply with demand in this space."
He said discussions with farmers would start immediately.
Some Fonterra farmers already have a2-ready herds and others will be thinking about converting, he said.
Hurrell said it was clear consumers were wanting choice.
"Consumers are wanting choice and options in a similar way that some consumers are demanding organic milk," he said.
Geoff Babidge, CEO of a2 Milk, says NZ take-up of a2 milk could change under the new deal with Fonterra. Photo / Dean Purcell
The deal means Fonterra can supply a2 Milk with A1 protein-free milk products in bulk powder and consumer packaged forms, in exchange for an exclusive licensing agreement to produce, sell and market A2 branded fresh milk in New Zealand.
The partners will set up an A1 protein free milk pool in Australia, and Fonterra also gets exclusive supply rights for some products in new markets for a2 in Southeast Asia and the Middle East.
Most milk contains the A1 and A2 beta protein but a2 Milk specialises in milk from cows that produce just the A2 protein, which it says helps people who have trouble digesting standard milk.
A2's relations with Fonterra have not always been friendly. A2, in its early days, had claimed that standard A1 milk was linked to heart disease and childhood diabetes and Fonterra had hampered a2's efforts to get the new milk to market. Farmers supplying milk to a2 had to terminate their contracts with Fonterra or establish new herds.
Listed on the NZAX alternative market in 2004, a2 spent its initial years out of favour with investors.
A2 Milk listed on NZX's main board in 2012 and listed in Australia in 2015.
Harbour Asset's Rimer said a2 Milk's tie-up would add credibility to its brands.
"They are building the foundations now taking this brand global, but it's not going to happen overnight," Rimer said.
