A2 Milk to acquire Murray River dairy as profit surges 34%

A2 Milk has opened its chequebook to strengthen its manufacturing capability, as annual profit jumped by one third.

a2 skim milk powder. Picture: Peter Hemphill

A2 Milk has opened its $NZ854.2m ($778m) cashbox to invest in manufacturing, announcing its intention to acquire a milk processing facility on the Murray River as it delivered a 34.1 per cent surge in full-year net profit.

Under the deal, believed to be worth less than $NZ20m, the trans-Tasman dairy company will acquire long-time supplier Kyvalley Dairy Group at Kyabram in north central Victoria.

The deal is subject to Foreign Investment board approval and will involve expanding A2’s manufacturing capability of its liquid milk business rather than its highly successful Platinum brand of infant formula, which Synlait produces under contract in New Zealand.

Chief executive Geoff Babidge, who flagged in February that the company was looking to transition to becoming solely an infant formula brand owner to manufacturer, said the Kyvalley deal did not derail its infant nutrition plans.

“This is not either/or,” Mr Babidge said.

“Our key focus on capital deployment and our key strategic initiative is the opportunity to participate in manufacturing capacity and capability in infant formula. That’s where we have been particularly undertaking work on in the last six months.

“That has also included talking to our key strategic partners on supply in New Zealand with Synlait and Fonterra to assess opportunities.”

Kyvalley has long supplied the company with liquid milk for the Victorian market, while its factory at Smeaton Grange in southwest Sydney supplies the NSW and QLD markets. Mr Babidge said the acquisition deal would involve A2 certified farmers continuing to supply Kyvalley with raw milk and the group’s existing management would continue to operate the plant.

The deal comes as A2’s net profit for the year to June 30 soared 34.1 per cent to $NZ385.8m. Meanwhile total revenue surged 32.8 per cent to $NZ1.73bn as Chinese parents continued their seemingly insatiable demand for the company’s infant formula despite growing trade tensions with Australia.

A2 shrugged off a fresh anti-dumping probe from China announced on Tuesday into another Australian product, wine. Beijing imposed a punitive 80 per cent tariff on Australian barley earlier this year amid a threat to boycott Australian products after Prime Minister Scott Morrison spearheaded a push for an inquiry into the origins of coronavirus.

But A2 said although it was ASX-listed it was a New Zealand-headquartered company, with the bulk of its China bound products produced across the Tasman.

“A vast and significant majority of The A2 Milk Company’s exports come from New Zealand.

Whilst it’s evident there are geopolitical tensions, we remain focused on building our unique brand proposition and developing our mutually respectful trading relationships,” the company said.

A2 Milk maintained an overall share of 11.3 per cent in Australia’s liquid milk market, despite increasing competition from the major supermarkets chains after the dumped their $1 a litre private label strategies and expanded their home brand product ranges.

“It is pleasing to report that our Australian fresh milk business continues to perform well with total revenue of $152.5m. In our most mature category we achieved double-digit revenue growth of 14.1 per cent,” Mr Babidge said.

But it is Platinum infant formula which remains the company’s rock star product, accounting for $NZ1.42bn of A2’s total revenue — an increase of 33.8 per cent.

To support this continued growth, the company has launched a new range of infant formula in Hong Kong and launched a stages 1-3 infant formula in Korea in a distribution deal with YuhanCARE. It also expanded its range of infant and adult products in China.

“Work progressed during the year to expand our product portfolio in China. A growing range of fresh, long life milk and powder products targeting families is expected to become a meaningful growth engine over time,” Mr Babidge said.

It is also expanding aggressively in the US, increasing its store footprint from 13,100 to 20,300, fuelling a near doubling of revenue in its American operations to $NZ66.1m. The growth was supported by a 45.1 per cent increase in marketing investment to $NZ194.3m, which was split across the US and China.

The company said it expected to maintain EBITDA margins of 30-31 per cent in the 2021 financial year, which includes spending $NZ50m on capital investment.

A2 will not pay a dividend.

Geoff Babidge, CEO of a2 Milk. Hollie Adams/The Australian