Investors weigh outlook for a2 Milk
Investors are grappling with the outlook for The a2 Milk Company as it embarks on a plan to remove old stock from the market and slow down sales to cope with an oversupply of product following Covid19.
On Monday, a2 Milk cut its fullyear forecast and revealed plans to destroy dated inventory after one of its key sales channels into the Chinese market, informal crossborder selling by international students and tourists known as the daigou market, was shut down because of Covid-19.
‘‘It is incredibly difficult to know how confident to feel about the future given the issues of surplus inventory and how that plays out,’’ Stuart Williams, Nikko Asset Management head of equities, said.
‘‘They have got a pretty solid plan for it, but it’s a very, very complicated distribution channel once it gets past their main sellers into resellers, so that’s the part that everyone will be considering, and it’s much more difficult to be certain about that.’’
Shares in a2 Milk closed down
6.5 per cent at $6.19 yesterday on the NZX, having dropped 13 per cent on Monday. The shares have lost 68 per cent of their value over the past year.
Williams said Nikko sold a2 Milk shares on Monday, extending its underweight position in the stock.
A2 Milk plans to rebalance its inventory by reducing the amount sold through the daigou and reseller sales channels for the remainder of this financial year, and potentially into the first quarter of next year.
It also plans to destroy an estimated 8 million to 9 million tins of older dated infant formula, and swap it for its customers and distributors with newer stock.
‘‘Their strategy seems to me entirely sensible and logical, but it’s hard to assess whether it will be successful,’’ Williams said.
Other factors weighing on the company’s share price were concerns about a slowing birth rate in China, which would reduce demand for infant formula, and the likelihood that the company’s drop in value could see it removed from a major MSCI Index, which will force investors who follow the index to sell the shares.
A2 Milk has had a wild ride on the sharemarket, and was once the largest company, with a market capitalisation of $9 billion. It is now valued at $4.6b.
Salt Funds Management portfolio manager Matt Goodson said it was ‘‘becoming reasonably clear that while the company was growing like topsy, a lot of it was from channels that weren’t in their control’’.
‘‘They were running 100 miles an hour to stay still, and then you have the perfect storm come along with Covid, which completely closed the informal daigou trade.’’
While a2 Milk was doing the right thing by trying to build up its own distribution through some 22,000 Mother and Baby stores in China, that would take time and the profit margin would be lower than for the daigou trade where someone else was shipping and marketing the product for you, Goodson said.
‘‘That is what the market is coming to grips with. It’s just trying to understand what their growth outlook looks like, and what the margin is going to be, which is clearly going to be a lower figure than back in the euphoric days of a couple of years ago.
‘‘It could potentially be an opportunity, but that’s going to depend on how the future plays out,’’ he said.
Salt Funds holds a2 Milk shares, with a relatively neutral position in line with its weighting in the market, he said.
Still, Goodson said he was confident that a2 Milk was not in trouble. He noted the company had no debt, a significant amount of cash, and still had a major market opportunity.
‘‘The company itself still looks quite exciting, just not quite as exciting as it was in those euphoric days a couple of years ago.’’
‘‘Their strategy seems to me entirely sensible and logical, but it’s hard to assess whether it will be successful.’’
Stuart Williams, Nikko Asset Management head of equities