A2 shares tumble after revised outlook disappoints

Monday, 28 September 2020

Shares in a2 Milk Company fell more than 12 per cent on Monday morning after the company revised its earnings outlook.

The stock, one of the NZX”s most resilient performers during the pandemic, sank to $16.20 after revealing that its first half revenue would be materially hit by lower demand from Chinese resellers or '’daigous’’ in Australia.

Analysts said the new forecast for first half revenue was 11 per cent lower than expectations, even though the full year outlook was still better than last year’s result.

Mark Lister, head of research at Craig Investment Partners, said the revised outlook was not terrible ‘’because the company’s obviously growing strongly’’.

**READ MORE:

Analysts said a2’s new forecast for first half revenue was 11 per cent lower than expectations.

* A2 Milk benefits from Covid-19 'pantry stocking', posts record $386 million profit

* Coronavirus: Pantry stockers a boon to dairy darling A2

* A2 Milk posts record profit on strong Chinese demand

A2 Milk Company managing director Geoff Babidge.

‘But ’’it’s definitely a weak trading update … and it adds some uncertainty into the mix, in terms of whether they can make that full recovery and play catch up in the second half of the year.’’

A2's chief executive Geoff Babidge said the company was being buffetted by Covid-related blips including a reduction in the daigou business, which had tailed off during the Melbourne lockdown and the tourism downturn in Australia.

‘'This disruption in the daigou channel is impacting our September sales and it is currently anticipated that this will continue for the remainder of the first half of the 2021 financial year.''

While the ‘’daigous’’ represent a significant proportion of a2's infant formula sales in Australia and New Zealand, the company stressed that the overall business was still going well.

Demand was still strong for its brand in China and there were good sales of liquid milk in Australia and the US. The company expected a significant improvement in group performance in the second half of the year.

Another drag on the first half was the effect of pantry ‘’destocking,’’ which was expected after strong pandemic sales earlier this year.

Babidge said the company warned during its recent annual results that continuing Covid-related uncertainty and the potential for economic ''moderation'' could have an effect, particularly on supply chains.

The company’s revenue, which jumped 33 per cent jump in 2020 to $1.73 billion, is now expected to be $1.8b to $1.9b in the full year, and $725 million to $775m for the first half.

Group earnings before interest, tax, depreciation and amortisation (Ebitda) were expected have a margin of around 31 per cent.

Lister said a2 had had a very strong run and even after falling 25 per cent from its peak in July, the stock was 7 to 8 per cent stronger this year. ‘’It’s still been a good performer.’’

The company has recently announced plans to take a controlling stake in Mataura Valley Milk, potentially reducing its reliance on listed dairy company Synlait, which it holds a stake in.

Synlait which announced its full year result on Monday, was also off nearly 6 per cent on Monday morning to $5.69.

Synlait said its net profit had fallen 9 per cent due to the ongoing cost of new dairy factories and acquisitions, rather than a falloff in demand. The company is also facing ongoing legal wrangles over its new Pokeno factory.