A2 Corporation reported its full year 2013 result this week and beat its own forecasts by more than a few crates of milk. Revenue came in at $94.3m, beating company forecasts by 11% and Australian earnings before interest, tax , depreciation and amortisation, before intercompany charges came in at $14.9m versus expectations of $11.2m, an upside surprise of 33%. More importantly the growth throughout the year in Australia accelerated as the brand and health benefits of A2 milk gained further attention.

A2 milk only contains the A2 protein which is the same as naturally occurring human milk. This is different from run of the mill dairy milk which is a combination of A1 and A2 milk. There is a growing body of research showing the health benefits of A2 milk over normal milk and many people who consider themselves lactose intolerant can drink A2 milk without any issues. The emergence of this new milk category is helping to grow the overall milk market in Australia that has been stagnant for years.

A2 milk continued to gain share in Australia despite its premium pricing, reaching 7.4% market share. Gross margins increased to 35.7% helped by a new plant in Sydney that has lowered cost of production. Going forward a new plant in Western Australia will help further with its cost structure and additional products will help drive further brand momentum. In the UK, product roll out has been slightly slower than expected but A2 products are now being sold through around 850 stores. Medium term expectations remain robust as the brand gains recognition and a loyal following as in Australia.

The company’s Platinum Infant Formula first shipment has been dispatched to China with initial sales being expected in November. The launch of the Platinum product in New Zealand and Australia will commence in the month, prior to the Chinese launch.

A2 Corp. has grown from a niche New Zealand success story to a truly global brand with further growth potential through geographic expansion and expanding its product offering. Future growth will be supported by a broadening array of supportive research and literature showing the health benefits of A2 milk. The company has a $20m war chest to drive expansion, has a strong balance sheet, is earnings positive and is only just starting to scratch the surface in terms of expansion opportunities.

A2 Corp. has been an exciting and welcome addition to the NZX50 Index.

Mark Warminger

Portfolio Manager

Disclosure of Interest: Milford Asset Management holds A2 Corporation shares on behalf of clients