A2 to increase farmgate milk prices, upgrades profit outlook

A2 says sales of its liquid milk products have benefited from the storm that has engulfed the dairy sector.

A2 managing director Geoff Babidge.

The a2 Milk Company says sales of its liquid milk products have benefited from the storm that has engulfed the Australian dairy sector and that the group intends to deliver price increases to its farm suppliers in the year ahead.

A2 yesterday issued its third profit upgrade in six months, underpinned by stronger than expected demand for its products in China despite a regulatory crackdown, including a new tax on foreign products bought through online retailers.

The group is now projecting revenues of $350 million-$360m for the current financial year and pre-tax earnings of $52m-$54m.

In February the group provided guidance of revenues of $335m-$350m and earnings of $45m-$49m.

New Zealand broking firm Edgeware said that after the upgrade it remained strongly convinced that a2 in 2017 would “generate more than double the profitability and free cash flow of full-year 2016’’. a2 shares rose 12 per cent on the ASX to $1.685.

“The liquid milk brand is performing strongly. The recent ­publicity around the impact of price cuts on farmers has been a positive to us,’’ chief executive Geoff Babidge said.

He said the group had experienced a better-than-expected adjustment to new infant formula regulations in China.

In the past six months, a2 has signed deals with the likes of the TMall, VIP.com and JD.com platforms to sell infant formula direct to Chinese consumers over the ­internet.

It received further good news this week, when the China Food and Drug Administration announced new regulations aimed at reducing the number of infant ­formula brands sold across the country.

The rules limit registered factories in China and offshore to producing three brands and nine different products each, which will benefit infant formula makers such as Bellamy’s Organic and a2.

“We believe we are well placed to continue to respond to other potential changes in that environment as and if they emerge,’’ Mr Babidge said.

From January 2018, a2’s infant formula products will need to be registered with China Food and Drug Administration

“There are implementation ­issues that we believe we are well placed to work through,’’ Mr Babidge said. “ We are well progressed in having our documentation ready at the earlier time rather than leaving it till later.’’

His comments were backed by UBS, which noted that a2 was “well placed to benefit from likely brand consolidation’’.

A2’s biggest milk supplier is the Perich family’s Leppington Pastoral Company. Its prices are about 30-40 per cent higher than those paid to farmers supplying the likes of Murray Goulburn and Fonterra.

“Our upgrade is in no way influenced by any downward movement in farmgate price,” Mr Babidge said. “We have paid the highest farmgate price for liquid milk in Australia. There has been no movement down. And next year there will be a certain movement up for some farmgate prices.

“We continue to have a waiting list in terms of suppliers that would like to supply us.’’