A2 Milk launches $134m share buyback as profit jumps 52pc

The wait for a dividend continues for A2 Milk investors. Instead, the group will complete a $134m share buyback, saying it’s a more effective use of capital management.

A2 Milk shares have surged almost 10 per cent as chief executive David Bortolussi said the company had been able to turnaround its Chinese business and launched a $NZ150m ($133.6m) share buyback.

The trans-Tasman company delivered a better-than-expected result in its Chinese infant formula sales, which jumped 12.2 per cent despite the overall market contracting 4.3 per cent as the Chinese birthrate tumbled 11.5 per cent.

A2’s overall revenue soared 19.8 per cent to $NZ1.5bn, with its net profit leaping 52 per cent to $NZ122.6m in the year to June 30.

It comes as pandemic-fuelled border restrictions and subsequent collapse of the lucrative Chinese daigou, or reseller market, hit the company hard, wiping 75 per cent of its market value and sparking three shareholder class actions.

Mr Bortolussi has reset the company’s China strategy and distribution, and as a result it has been gaining more market share as the Chinese reseller market returns.

“The daigou channel has suffered significantly overall in the last couple of years. Last year it was down 42 per cent and this year down 17 per cent,” Mr Bortolussi said.

“If you look at the total English label category in the channel, our English label is down 9 per cent, so the trajectory has improved a lot. That was down 33 per cent last year.

“The rate of decline that we’ve had which has largely been associated with our inventory rebalancing and our getting our channel economics right and is starting to improve. We’ve been down 2 per cent in the last several halves and the last half we are down less than 1 per cent.”

A2 Milk shares closed 9.98 per cent higher at $5.40 on Monday – a five-month high. This compared with a 2 per cent fall across the broader share market.

Mr Bortolussi said the company would embark on an on-market $NZ150m share buyback, rather than pay a maiden dividend, saying it represented “effective capital management”.

“We may return more capital in the future, and the mechanism may change in the future. But at the moment, a buyback is a common market mechanism in the New Zealand market, and it treats all shareholders equally, no matter what residency they have – Australia, New Zealand or elsewhere,” he said.

“And the tax complexities associated with a dividend, given our corporate structure and imputation credits and franking credits, is more complicated. So this is the right way to return capital to shareholders.”

A2 finished the year with $816.6m in cash. Macquarie analysts said the market will view the buyback positively.

“A2 Milk … (has) sufficient cash to invest in growth, manage risk (class action) and have a buffer,” said Macquarie, which has an underperform rating on the stock.

“A2M has guided to high single-digit revenue growth in FY23, which is broadly consistent with an annualisation of the 2H revenue run rates, while consensus of ~$1.58b is 9.5 per cent on FY22A. Our revenue forecast is higher reflecting assumed price increases and FX benefits, so understanding volume progression will be key.”

Citi analyst Sam Teeger said: “China label IMF (infant formula) sales are expected to see significant 1H23 growth on 1H22”.

“2H23 will see limited growth due to GB (new China national standards) registration transition. 1H23 English label sales are expected to be in line with prior corresponding period. due to transition of product range.”

In the past year, China and other Asia revenue vaulted 24.5 per cent to $NZ726.5m, while earnings before interest, tax, depreciation and amortisation almost doubled to $NZ141.m.

“Our significant increase in marketing investment has driven further gains in brand health metrics and record market shares delivering strong growth in our China infant milk formula business,” Mr Bortolussi said.

“We are pleased with the transition of our English label product distribution to more transparent, performance-based and exclusive partners. We remain committed to the daigou channel and have increased our direct engagement and marketing support with more daigou supporting the brand.”

Across its North America business, revenue leapt 30 per cent to $NZ82.7m, while EBITDA fell 9.4 per cent to a loss of $NZ36.7m. It comes as the US Food and Drug Administration halted the company’s application to import infant formula to America to help ease a chronic national shortage.

Mr Bortolussi did not mention the FDA decision in the company’s annual results announcement, but attributed the EBITDA loss mainly to increased freight costs.

“Marketing and SG&A (selling, general and administrative) costs were relatively flat in combination. EBITDA losses were also higher due to foreign exchange movements.

“Accelerating the path to profitability in the USA by FY25/FY26 remains a key strategic focus and the company expects to make meaningful progress on this during the year ahead.”

In its home Australia and New Zealand market, revenue dipped 4.8 per cent to $NZ532.7m, while EBITDA jumped 16.4 per cent to $NZ173.2m.

“Lower revenue was a direct consequence of the company restructuring its English label IMF (infant formula) route-to-market and reflected a mix shift in English label IMF sales from an existing reseller to CBEC (cross-border e-commerce) distribution partners,” Mr Bortolussi said.

“Higher EBITDA was driven mainly by cycling prior year inventory writedowns, pricing and favourable foreign exchange, partially offset by higher cost of goods sold.”

ANZ liquid milk sales “increased marginally” by 1.8 per cent to $NZ172m. The company has entered the $120m lactose-free market to further boost sales.

“Lactose-free milk is a significant category in Australia, with retail sales value greater than $NZ130m. The Company has secured arrangements for distribution of the range with major supermarket retailers in Australia, supported by a targeted marketing campaign,” Mr Bortolussi said.

“The A2 Milk, UHT, A2 Milk cream on top and recent A2 Milk lactose-free launches are consistent with the company’s strategy of ramping up innovation to drive growth.

Mr Bortolussi did not give detailed guidance, only saying: “Outlook for the business in FY23 is positive with continued revenue and earnings growth expected, and the company is on track to deliver on its medium-term financial and non-financial ambitions communicated to the market at its investor day in October 2021.”