A2's shares hit record on 1H results, Fonterra deal

A2 Milk

[NZX:ATM] shares spiked 16 percent to a record after the company has announced a sweeping strategic agreement with dairy giant Fonterra [NZX:FSF] at the same time as it reported a 150% jump in first-half net profit.

The shares jumped to a record $10.80 in the first two minutes of trading this morning.

While A2 Milk has gone from strength to strength on the burgeoning sales of its Platinum infant formula, Fonterra has struggled to perform.

Fonterra also spent years of effort to dispute the science behind A2 Milk – A2 claims its milk, which is free from A1 proteins, is easier to digest.

Most New Zealand and Australian milk contains both the A1 and A2 proteins.

Fonterra also passed up opportunities to buy A2 before its performance – and value – started to skyrocket.

A2's market capitalisation is now $6.8 billion.

A2 reported a $98.5 million net profit for the six months ended December, up from $39.4 million in the same period a year earlier.

It says Fonterra will exclusively supply A1 protein-free milk products in both build powder form and consumer packaged form to A2 Milk.

As part of this, it has granted Fonterra exclusive supply rights for certain nutritional products destined for sale in certain A2 Milk new priority markets in South East Asia and the Middle East up to a specified volume.

“In return for these rights, A2 Milk has become a strategic customer of Fonterra with allocation of production capacity as volume grows and competitive commercial terms,” the company says.

“The products will be manufactured at Fonterra’s Darnum factory in Victoria, Australia and packaged into consumer packaged form at Fonterra’s facility in Hamilton,” it says.

To support the agreement, a new A1 protein-free milk pool will be developed in Australia in conjunction with A2 Milk.

Exclusive licence
A2 Milk has also awarded Fonterra an exclusive licence to produce, distribute and market A2 branded fresh milk in the New Zealand market and to supply this milk Fonterra and A2 Milk will establish another A1 protein-free milk pool in New Zealand.

Synlait Milk [NZX:SML] already manufactures A2’s infant formula from its Dunsandal plant in Canterbury and manages the A1 protein-free milk pool supply.

A2 says the two companies will seek to establish distribution and sales arrangements where Fonterra has resources and execution capability to assist A2 Milk’s market entry strategies in its new priority markets.

The services may relate to any of importation, registration, warehousing and sales and distribution.

A2 Milk has also granted Fonterra an exclusive period to explore producing A2 branded butter and cheese and a milk pool of A2 fresh milk in China.

“Given A2 Milk is now considering investment in blending and canning capabilities, A2 Milk and Fonterra have also agreed to explore the potential establishment of a jointly-owned facility as an extension of the arrangements," it said in a statement.

A2 chief executive Geoff Babidge says the comprehensive strategic relationship presents his company with “a range of significant medium and long-term opportunities.”

A2 Milk’s results show revenue rose 70% to $434.7 million in the latest six months while earnings before interest, tax, depreciation and amortisation rose 123% to $143 million.

Operating cashflow was $116.4 million, taking A2’s cash balance to $240.2 million.

(Additional reporting BusinessDesk)

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