A2 Milk shares rally as turnaround gathers momentum; FY22 profits jump 42.3%

A2 Milk (ASX: A2M) shares are up 7.5% in early trade after posting strong double digit earnings growth for FY22 and declaring a share buyback of NZ$150m.

“We are pleased with the progress that has been made in stabilising the business, refreshing our strategy and improving our execution," said managing director David Bortolussi.

The NZ$114.7m profit figure for FY22 was ahead of Bloomberg estimates of NZ$112m.

Earnings at a glance:

Source: A2 Milk | Table: Market Index

Better growth, refreshed strategy

A2 Milk notes that the inventory management actions taken last year to address excess inventories have "proven effective" with "channel inventory at target levels, product freshness amongst the best in the industry and improved market pricing."

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

"We have maintained our brand leadership position in liquid milk in Australia with increased loyalty and household penetration, and our USA milk business grew strongly during the year driven by innovation," he added.

Segment highlights:

• ANZ: Revenues fell -4.8% to NZ$532.7m. ANZ baby formula sales fell -7.9% to NZ$328.8m but CBEC channel sales recovered 53.3% to NZ$255.8m. Daigou trajectory is improving following a change in distribution partners and increased support for the channel. Liquid milk sales increased marginally by 1.8% to NZ$172m

• China & Other Asia: Revenue rose 24.5% to NZ$7265m. Number of births in China fell -11.5% in 2021 and expected to further decline. Still achieved record market shares in China and focused on growing regional and e-commerce distribution. Sees 'significant opportunity' to grow market share from its current levels of 4-5%

• USA: Revenue rose 30% to NZ$82.7m. Segment still posted an EBITDA loss of -NZ$36.7m. Higher revenue driven by growth in core liquid milk and introduction of new products

A positive FY23 outlook

FY23 guidance was light on guidance but full of optimism.

"The company is expecting high single digit revenue growth in FY23. 1H23 growth is expected to be significantly higher than 2H23 growth," said A2.

Growth in the second-half of FY23 is expected to be impacted by the company's pending GB registration for dairy sales in China.

Gross margins are expected to be 'broadly in line with FY22', as inflationary factors will be offset by price increases and cost mitigation initiatives.

A2 Milk share price chart