20 Nov, 2019 5:00am
A2 Milk's share price rallied sharply after the company delivered an upbeat message at its annual meeting in Auckland yesterday.
What looked like a short-covering rally drove the stock sharply up to a high of $15.21 - a rise of 18.7 per cent from Monday's close after the alternative milk and formula company said its profit margins would be a better-than-expected 29 to 30 per cent in the current financial year.
A2 Milk's shares peaked at $18.02 just before the release of the company's annual result in August which, while very strong, disappointed some, driving the stock lower.
Chief executive Jayne Hrdlicka said she expected to see strong revenue growth, supported by a2 Milk's investment in China and the United States, in the current year.
"Overall, for 2020 we anticipate continued strong revenue growth across our key regions supported by brand and marketing investment in China and the US and the development of both capability and infrastructure to support in-market execution," Hrdlicka said at the annual meeting in Auckland.
The company's shares have been under pressure since its annual result on worries about tighter sales margins.
A2 Milk is often targeted by short selling - the sale of a share that the seller has borrowed. The short seller profits if the share price declines by picking it back up later at a lower price.
But when the market turns in the stock's favour, the shift higher can make the move more dramatic than it would do otherwise, triggering a short-covering rally.
Mark Lister, head of private wealth research at Craigs Investment Partners, said the market reaction reflected positive news on the margin front, and was in a sense a "relief" rally after the stock came under pressure since its last result in August.
"That's good news and it suggests that some of the steps they have taken are working," he said.
"A few people probably shorted the stock have been taking back those shorts."
Sam Dickie, senior portfolio manager at Fisher Funds, said the step up in a2 Milk's investment was already paying off.
He said the bearish camp had felt that there would be a revenue "miss", a decline in EBITDA margins, that Hrdlicka would not provide a detailed run-down on how the company was doing in its various sales channels, and that not enough rigour was being applied to assess the value of its spending on marketing.
"There were four prongs to the bear stool and they've all been kicked away," Dickie said.
A2 Milk said it expected to see strong revenue growth, supported by its investment in China and the United States, in the current financial year.
Hrdlicka told 200 or so shareholders a2 Milk's China strategy entailed building a broad-reaching business to serve consumers across all retail channels.
"Despite the considerable success we have enjoyed, we are only just beginning on the journey to our full potential in this market," she said.
In the US, where a2 Milk is making as big push, Hrdlicka aid the first half result would be "excellent".
A2 Milk's growth strategy for the US is focused on building a milk business of scale across grocery, mass merchandisers, natural, and club channels.
"We have made significant progress in penetrating and demonstrating strong consumer acceptance across all these channels to date and are encouraged by our most recent results," she said.
The company commercialises intellectual property relating to A1 protein-free milk that is sold under the a2 and a2 Milk brands, as well as the milk and related products like infant formula.
For the first half of the financial year, a2 Milk anticipates revenue in the range of $780m to $800m.
In a separate statement, a2 Milk said it had extended its supply agreement with its part-owned supplier, Canterbury-based Synlait Milk.
The 2018 agreement provided for a minimum term of five years, with a rolling three-year term from August 1, 2020.
A two-year extension to the term of the agreement, effectively providing for a new minimum term to, at the earliest, July 31, 2025.
A2 Milk finished the day at $14.12, up $1.32 or 10.3 per cent.
A2M Price at posting:
$13.37 Sentiment: Buy Disclosure: Held
(20min delay)