A2 Milk lowers forecast as surrogate sales sour

INFANT formula marketing company A2 Milk has lowered its annual earnings forecast for the fourth time since September as the pandemic continues to crush sales via Chinese surrogate shoppers.

The company also said the chief executive of its Asia-Pacific division, Peter Nathan, had resigned and it had started a review of its business, in particular its reliance on daigou – surrogate shopping – sales.

“The board recognises that the company needs to change its approach and is commencing a comprehensive process to review its growth strategy,” it said.

A2 Milk’s share price has slumped by nearly two-thirds since August last year, wiping about $NZ10 billion ($9.3 billion) from its market value. Before the slide, it was one of the largest companies by capitalisation in New Zealand’s sharemarket despite its reliance on the opaque daigou trade for a significant part of its sales.

A2 Milk forecast an underlying profit margin of 11-12 per cent for its 2021 fiscal year, down from the 24-26 per cent it forecast at its third earnings downgrade on February 25.

The substantial downgrade partly reflects an estimated $NZ80m to $NZ90m of new provisions against profits for excess inventory that will need to be written down in value.

A2 Milk said the amount of inventory in the daigou and reseller system was larger than it had anticipated earlier in its financial year when it laid plans for a recovery in daigou sales. It expects full-year revenue of $NZ1.2bn to $NZ1.3bn, down from $NZ1.4bn forecast in February.

The company had about $NZ775m of cash at the end of 2020.

It said on Monday it was considering options for returning capital to shareholders, including a share buy back.