Financial Analysis of A2 Milk Company: HI5002 Group Assignment

This report provides a financial analysis of the A2 Milk Company, examining its performance during the 2019 financial year. The analysis focuses on key aspects such as revenue growth, particularly in liquid milk and infant nutrition sales, with specific figures for Australia, New Zealand, and Greater China. It also delves into the company's share structure, including an increase in the number of shares and investments in Synlait. The report assesses the impact of share issuances on the capital structure and the company's investment strategy, referencing the annual report and relevant financial metrics. The analysis concludes that the company's investments have been feasible, and the capital structure is balanced. The report uses financial data, including share prices and investment values, to support its findings, offering insights into the company's financial health and performance.

2.1
A2 Milk Company is one of the Australian listed companies that is used to commercialize the
intellectual property relating to A1 protein free milk which is sold under A2 and A2 milk brands
as well as milk and milk related products like infant formula. The products that are sold by A2
milk are ghee, milk, full cream milk, skim milk powder and smart nutrition. The products are
useful products and important not only for the youngsters but also for infants (A2 milk, 2019).
The infant formula and the fresh milk is one of the classic products that can create the
competitive advantage as the quality infant formula is hardly in the market to cater the needs of
the infant. As per the results of the financial year of the year 2019, it can be inferred that the
sales of the company in terms of the fresh milk grew to 22.9% and revenue of $174.9 million
across the group. This figure has driven the entire company as the gross margins remained stable
at 54.7% and this improvement was driven by the changes in the share prices, partially offset by
the currency movements. The balance sheet of A2 Milk Company is strong and robust without
having any kind of the debt and the cash in hand is enough so that expenses can be dealt without
any hassle.

It can be observed from image that the liquid milk excels and the revenue reached to $133704
whereas the infant nutrition was higher than the normal milk at $652864. These figures are for
Australia and New Zealand whereas the Greater china and other Asia are also selling the infant
nutrition. Hence, it has been proved that the infant nutrition is in much more demand and the
competitive advantage can be gained through the selling of infant nutrition (Rao, 2016).
2.5
In the present case the number of the shares of A2 milk Company has been raised by 2929
numbers in comparison to the previous years. The cost to issue such shares is 41 and the
information of the investment is available on page number 79 of A2 milk Company. In the
month of August 2018, there was further investment made by the company in Synlait acquiring
14840527 shares for $162335000 increasing its total holding in Synlait to 17.39%. The fair value
of $6239000 was recognized for the respective year. As it can be observed from the annual

report of the financial year ending 30th June 2019, the investment at FVOCI was $286807. The
method that has been recorded to evaluate the investment is at the closing price at 30th June 2019.
The absolute share price growth hurdle is a minimum share price CAGR of 10% over the
performance period, subject to annual retesting until the performance condition is met, or the
performance period ends (Esty and Fisher, 2019). The weighted average share price on exercise
of the options in the period was $12.03. The issuance of shares has affected the capital structure
of the company but not to the major extent. Therefore from the above analysis it can be
concluded that the A2 milk has bought shares and it has been feasible for the company as the
capital structure shall not contain only debt component as this would increase the financial
leverage of the company. Further, the balanced and the optimal capital structure is one that is
relevant if the equity as well as the debt component gives the tax advantage whereas the equity
component gives the special privledges (Choi, Guo, Liu and Shi, 2019).

References
A2 milk, (2019) Annual Report [Online] Available from https://thea2milkcompany.com/wp-
content/uploads/The-a2-Milk-Company_FY19-Annual-Report_double-pages-1.pdf [Accessed on
25th September 2019].
Choi, T.M., Guo, S., Liu, N. and Shi, X., 2019. Values of food leftover sharing platforms in the
sharing economy. International Journal of Production Economics, 213, pp.23-31.
Esty, B. and Fisher, D., 2019. The a2 Milk Company. HBS Strategy Case, (719-424).
Rao, D., 2016. Safety of Milk Processing and Distribution Chain in India. In Regulating Safety of
Traditional and Ethnic Foods (pp. 169-185). Academic Press.