Shares in a2 Milk tumble after first-half profit falls 35% and outlook weakens
Thursday, 25 February 2021
Shares in The a2 Milk Company plunged to their lowest level in a year after the dairy company reported a “challenging” first half, with profit dropping 35 per cent as the Covid-19 pandemic disrupted sales.
A2 Milk’s shares slumped 16 per cent to $9.33 shortly when the market opened after the company said net profit fell to $120 million in the six months to the end of December, from $184.9m in the same period the previous year. Revenue dropped 16 per cent to $677.4m, compared with its forecast of $670m.
A2 Milk, which specialises in marketing dairy products with the A2 protein, suffered a setback during Covid-19 as border closures meant fewer tourists and international students shipped its products to China, known as the daigou trade. The result comes after it downgraded its forecasts in December.
“The a2 Milk Company experienced a challenging first half,” said managing director David Bortolussi. “This was driven by performance through the daigou and cross-border e-commerce (CBEC) channels being significantly impacted due to disruption resulting primarily from Covid-19 related issues.”
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A2 Milk held $198.6m of inventory at the end of December, $51.2m more than it was holding at the end of June due to uncertainty around supply chains during the pandemic. Disruption to its daigou and cross-border sales meant the running down of the inventory had been slower than expected and the company wrote down the value of the stock by $23.3m in the first half.
Bortolussi said a2 Milk expects a return to more normalised stock levels in the second half of its financial year.
“They have had a few downgrades of late and unfortunately, this announcement continues that trend,” said Grant Davies, an investment adviser at Hamilton Hindin Greene. “Investors will be disappointed that they haven’t quite managed to hit their marks.
“They are still finding it a little bit tough in that daigou channel and their attempts to circumvent that is having an impact on their margins.”
A2 Milk’s margin on group profit before interest, tax, depreciation and amortisation (ebitda) fell to 26.4 per cent in the first half, from 32.6 per cent in the same period last year.
The company may struggle to get back to its previous level of margins, Davies said.
“Globally there continues to be unprecedented levels of uncertainty and volatility due to Covid-19,” Bortolussi said.
“The pace of recovery in the daigou/reseller channel and in the CBEC channel has been slower than previously anticipated and the company now expects revenue to be at the lower end of the previous guidance range.”
A2 Milk now expects full-year revenue of $1.4 billion, at the bottom of its previous forecast range of between $1.4b to $1.55b. That’s a drop from 2020’s full-year revenue of $1.73b
Previously the company said it was expecting a full-year ebitda margin of between 26 and 29 per cent. It has now lowered that range to between 24 and 26 per cent.
Bortolussi said the outlook for the full-year assumes the company’s actions to re-activate the daigou and reseller sales channels deliver “a significant improvement” in quarter-on-quarter growth from the third quarter to the fourth quarter.
He said the company remains confident in the underlying fundamentals of the business and would continue to invest in the brand and in its capability to drive long-term growth.
Its liquid milk businesses in Australia, its United States business and its Chinese-label milk formula business all increased revenue in the first half.
”There are some positives to be taken out of the growth that they are getting,” Davies said. ”Long term, the brand they have cultivated over the years is still very very strong.”
A2 Milk shares have dropped 41 per cent over the past year.