Perpetual August fund update

A2 MILK COMPANY LTD (ASX: A2M) (ANALYST: SEAN ROGER)
A2M reported a solid FY22 result with revenue and earnings approximately 5% ahead of consensus expectations. The company
reported a 19.8% jump in revenue and 42.3% jump in net profit. While earnings beat market expectations, the Manager thought it
could have been larger had the company’s management not taken the decision to increase marketing investment above forecast
levels. The quality of A2M’s results was strong with excellent cashflow management where cashflow was greater than profits
delivered for the period.
The most pleasing aspect of the result was the strong growth of the China Label infant formula business. This is a highly competitive
channel and despite the industry headwinds from a significantly lower birth rate in China, A2M’s infant formula business in China
grew its revenue by 40% Year On Year (YOY) in the second half of Financial Year 2022 (FY22). A2M is one of the only international
brands to deliver growth during this period. The fact that A2M sales responded so strongly to in-country marketing demonstrates the
strength of the brand which is a core pillar of the Manager’s investment thesis.
The Manager believes the current management team is doing an excellent job of transforming A2M into a sustainable business for
the long term by increasing marketing and shifting volumes away from the volatile Daigou distribution channel. Another key aspect is
the strength of A2M’s balance sheet which finished in FY22 with no debt and over NZ$800m of net cash. This enabled the company
to launch a NZ$150m on-market buyback program. The Manager considers this a value accretive use of shareholder’s capital and
sends a strong signal to the market of the Board’s confidence in the trajectory of the company. A2M is currently in the process of
renewing its China Label product registration. The Manager notes this risk and has reflected it in the size of the position within the
portfolio. This aside, the Manager continues to see material upside to A2M’s current share price.
As at 31 August 2022, A2M comprised 3.1% of the PIC portfolio.