New Zealand's a2 Milk raises margin outlook as marketing pays off

(Reuters) - New Zealand's a2 Milk Company ATM.NZ raised its operating profit margin forecast on Tuesday on the back of higher marketing spending, sending its shares to a two-month high.

The dairy producer nearly doubled its spending on marketing in the year to June 30 as it tried to sell its products in smaller Chinese cities and grow its profile in the United States.

It expects to spend more again this year with a marketing budget of NZ$200 million ($127.9 million), compared with NZ$135.3 million last year.

The Auckland-based company advertises its a2 milk product as easier to digest than conventional milk because it lacks the A1 caesin protein.

Its earnings before interest, tax, depreciation and amortisation margin, or operating profit as a percentage of sales, is now expected to be about 29% to 30% for the full year, up from a rough forecast of 28% made in August.

Since its full-year earnings announcement in late August, a2 Milk’s shares have plunged 24% as investors worried about the impact of higher costs. Such concerns evaporated on Tuesday with margins set to exceed the company’s expectations.

“The main catalyst for the downside has been removed,” said Jeremy Sullivan, an investment adviser at Hamilton Hindin Greene.

Despite a nearly 19% jump in share price to NZ$15.21, the stock still sits below the levels it was at in August. The stock is however set to post its biggest intraday gain since February 2018.

In a separate release, dairy producer Synlait Milk SML.NZ extended its supply agreement with a2, its second-largest shareholder.

Reporting by Nikhil Kurian Nainan in Bengaluru; Editing by Stephen Coates