Milk producer A2 confirmed at its annual meeting it would probably face a period of increased spending as it invested in the infant formula roll-out, Craigs Investment Partners broker Peter McIntyre said.
The Dunedin-founded company continued to perform well in its core market of Australia and new focus markets of China and the United Kingdom.
''The company's full-year result helped drive another record revenue number, which was ahead of guidance. Solid performance and attractive growth potential has seen the share price gain more than 45% for the year to date.''
The UK launch of A2 milk started in October last year and it was now stocked by five major retailers in about 950 retail outlets. The company had been disappointed in the number of retailers on board and was seeking to expand the list of major supermarkets supplying A2 milk, Mr McIntyre said.
At the full-year result, the company lowered its 2016 financial revenue expectation from the UK business to $65 million from the $90 million previously expected. Additionally, market share expectations were reduced from 2.8% of the fresh milk market to 1.8%.
''Much of this was due to disruptions around the joint venture being purchased by another party, which led to a lack of focus on A2. A2 has now purchased the remaining 50% stake of the joint venture and the business will now operate as a wholly owned subsidiary of A2.''
The capital distribution to the UK business for the current year was likely to be in the order of $5 million, he said. The company would assume responsibility for the marketing strategy and bolster the sales function with additional staff. The share of associate earnings from the UK business would be a loss of about $1.8 million.
The China business continued to track well, with two shipments of infant formula having being sent and a third targeted for December.
A2 now had 18 sub-distributors through China State Farm. China State Farm being a state-owned enterprise was a ''significant advantage'' for A2, Mr McIntyre said.
First-half net profit was likely to be modest, given the launch costs of infant formula and currency impacts. With a number of costs ''front loaded'', the second half should see the benefits of investments made.
''While the long-term growth strategy is positive, it will come with a degree of execution risk. Given the small size of the A2 business, the inherent uncertainties of entering large new markets and the company's aggressive growth focus, it is important to recognise the potential risks associated with investing in this stock,'' he said.
