Can a2 Milk shrug off its rough year?

AUCKLAND: With $10 billion shaved off a2 Milk’s market capitalisation in less than a year, can the alternative milk and infant formula company recapture the stellar growth rates of the past?

Once one of the sharemarket’s biggest companies, a2 Milk is today worth about $5.4 billion, down from $16 billion at its peak just a year ago.

That plunge reflects the impact of four successive earnings downgrades.

Those downgrades were a rude shock to investors who had become accustomed to generous doubledigit revenue and earnings growth, driven in no small part by the popularity of the unofficial ‘‘daigou’’ sales channel from Australia to China.

Daigou involves crossborder exporting by individuals or a syndicated group of exporters outside China, buying commodities for customers in the Peoples Republic.

However, Covid19 has curtailed travel, severely limiting the trade.

It appears that the very thing that made a2 Milk great has become its Achilles heel.

It and other infant formula players also face a declining birth rate in China, made worse by Covid19.

As well, competition from the domestic infant formula companies — particularly from market leader Feihe — has picked up.

The a2 Milk story, based on the premise that milk containing just the a2 beta protein can help people who have trouble digesting milk, has captivated the investment community for years.

However, it remains a polarising stock: there are those who believe in the a2 concept and those who do not.

Regardless, a2 Milk — which effectively markets product that others have produced — has won plenty of converts, particularly in China, the world’s biggest infant formula market.

Even before a2’s latest problems, it was not all plain sailing.

It took a while to win over consumers, and investors, and soon after listing on the NZX in 2004 the company faced nearcollapse.

Deeppocketed early investors came to the party and a capital injection kept it in the game.

Its milk got an enthusiastic reception from consumers in Australia, where it now accounts for more than 10% of the fresh milk market, giving it a springboard for growth.

But when it started into a2 infant formula, its growth, aided in no small part by daigou, took on a whole new dimension.

In 2015, a2 Milk’s revenue was just $155 million. By 2020 it had gone to $1.7 billion.

At the end of 2019 the stock was recognised by financial journalists from the Bloomberg news agency as the best performing stock of the decade with a return of 16,150%; a2’s share price performance had far outstripped other high profile disruptive companies such as Netflix, which returned 4000% over the same period.

Now, with Australia, particularly the key city of Melbourne, suffering repeated lockdowns, that key daigou trade has been severely curtailed, meaning unsold product in a2 Milk’s distribution channels will need to be bought back and destroyed. —