Shares in a2 Milk climbed after the company told the market its supply problems in China have largely been sorted out and its full year sales are running ahead of where analysts had feared. The infant formula and dairy exporter, one of the most valuable companies on the New Zealand sharemarket, lifted the lid early on its financial year with a preliminary trading update that was better than the guidance it gave investors back in April.
In the announcement lodged with the exchange, a2 Milk said it now expects revenue of about $1.97 billion for the year to the end of June, up more than 12 percent on the year before. That is a strong result for a company that spent much of the past year wrestling with shortages, freight snarls and extra customs checks that left shelves in China short of its product at the worst possible time.
The core problem sat with the company’s China label infant formula, the tins made specifically for sale through mother and baby stores and online channels inside China. Those sales fell about 14 percent over the year, and most of that damage was done in the final quarter. a2 Milk pointed to a run of connected problems, including unusually strong demand in the quarter before that drained stock, freight challenges, a production backlog at its manufacturing partner, longer than usual product release times, and additional customs clearance and testing requirements at the border.
The important part for investors is that the company now says those problems are behind it. a2 Milk told the market the contributing factors to the product availability issues have now substantially been resolved, and that product flows to distributors and retailers have materially improved across both its China label and English label products, with stock levels returning to target. In plain terms, the tins are back on the shelves and the pipeline is refilling.
Investors liked what they read. The shares rallied 25 cents, or about 2.7 percent, to $9.60 in early trading after the update, as reported by the New Zealand Herald. That is a notable move for a stock that had been under a cloud since April, when the company warned that disruption in its supply chain would knock its numbers around.
On profitability, a2 Milk said its earnings before interest, tax, depreciation and amortisation margin should land at the high end of the 14.0 to 14.5 percent range it flagged in April. Net profit after tax is expected to be slightly up on the year before on a reported basis, and underlying net profit is also expected to rise. Cash conversion, a measure of how much of the company’s paper profit actually turns into money in the bank, sat at about 70 percent. The figures are preliminary and unaudited, so they could shift slightly before the final accounts are signed off.
The result underlines just how much a2 Milk’s fortunes are tied to a single market. China is by far its largest source of sales, and the infant formula category there is fiercely competitive, tightly regulated and sensitive to birth rates that have been falling for years. When something goes wrong in that channel, whether it is a freight bottleneck or a change in the paperwork required to clear the border, the effect shows up quickly in the company’s revenue. That concentration cuts both ways. It has made a2 Milk one of the great success stories of the New Zealand market over the past decade, and it is also the reason a bad quarter can wipe billions off its value.
Much of the manufacturing that feeds that China business runs through Synlait Milk, the Canterbury based processor in which a2 Milk holds a large stake and which makes a big share of its infant formula. A backlog at that end of the chain was one of the factors the company blamed for the recent shortfall, a reminder that the two companies rise and fall together. a2 Milk has spent recent years buying its own manufacturing capacity, including the Pokeno plant south of Auckland, in an effort to take more control of its own supply.
The update was authorised for release by managing director and chief executive David Bortolussi, though the company did not attach any direct comment from him to the preliminary figures. The full year results, with the audited numbers and management commentary, are due to be released on 17 August. That is when investors will get a proper look at the margins, the dividend position and how the company plans to keep its China sales growing while the wider market for infant formula shrinks.
For now, the message from a2 Milk is straightforward. A rough patch has passed, the shelves are stocked again, and the company has closed out the year in better shape than it warned three months ago. Whether that momentum holds into the new financial year is the question the August results will start to answer.
What do you make of a2 Milk’s reliance on the China market? Have your say in the comments below.
This article was written by AI, briefed to report the facts, hopefully without some of the bias people bring to the job 🙂
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