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 shares jumped 25 per cent, making the milk marketing firm New Zealand's biggest listed company on a deal that will give it backing from Fonterra Cooperative Group.
The stock gained $2.31 to $11.60, valuing a2 Milk at $8.47 billion, toppling Auckland International Airport at $7.75b, Fisher & Paykel Healthcare at $7.37b and Meridian Energy at $7.29b. The spike underpinned the S&P/NZX 50 index, which gained 1.5 per cent to 8,215.63 as at 2.35pm.
Net profit rose to $98.5 million in the six months ended December 31 from $39.4m a year earlier as sales climbed to $434.6m from $256m, Auckland-based, Sydney-headquartered a2 said.
A2 unveiled a strategic partnership with the world's biggest dairy exporter agreeing to exclusively supply a2 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 for end sale in the New Zealand market.
They'll 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 South East Asia and the Middle East up to a specified volume.
"It was a pretty significant announcement for a2 and shows their growth can move by a lot quicker than past opportunities with Synlait Milk," said Grant Williamson, a director at Hamilton Hindin Greene in Christchurch. "The Australian investors in particular just like this company."
Synlait shares sank 11 per cent to $6.31, having followed a2 higher through 2017 on expectations the close supply arrangement would see the milk processor benefit from the growing demand for the marketing firm's branded products.
"Investors in Synlait obviously through with the connection between the two, Synlait would have to keep up," Williamson said. "This changes things."
Units in the Fonterra Shareholders Fund gained 0.8 per cent to $6.05.
A2 managing director Geoff Babidge said he expects continued revenue growth in nutritional products in Australia, New Zealand and China in the second half, along with further growth in fresh milk in the United States.
Gross margin was 49.8 per cent in the first half, which he said was higher than expected "primarily due to the higher proportion of infant formula sales, currency movements and favourable net selling prices relative to plan. This was partially offset by product cost increases and margin mix within nutritionals. Subject to currency movements and realisation of throughput efficiencies, the company expects the gross margin percentage to be broadly consistent in the second half".
"As advised at the annual meeting in November 2017, earnings growth in the second half will be tempered by a higher marketing expense, with a half-on-half increase now likely to be in the range of $35-$40m given the timing and scope of marketing programmes in China and the United States. This increased brand investment will further support future growth in these key markets."
A2 managing director Geoff Babidge said he expects continued revenue growth in nutritional products in Australia, New Zealand and China.
Babidge said the company launched a formula for children aged over three years in Australia and China in August 2017, which "has performed above expectations", and another new milk powder product will be launched by the end of financial year, with others planned for calendar 2018.
The company began selling a2-branded fresh milk in Singapore in the year, and is now making weekly shipments and considering broadening the product range in that country.
In the first half, a2 settled a court case in Australia with its rival Lion Group over the science behind health-related claims about its milk.
Babidge said the company "expects broader interest in the A1 protein-free category over time", and "given its pioneering heritage, its comprehensive suite of intellectual property and a business model focused solely on products free of the A1 protein type, the company is well positioned to respond."
A2's board didn't declare an interim dividend, and said it was continuing to consider implementing a dividend policy along with an on-market share buyback as it evaluates the best use of its available capital.
The board is also reviewing opportunities to invest directly in blending and canning capability as part of its longer-term nutritional products sourcing plan, it said.
