A2 Milk chairman David Hearn says the lack of a daigou channel has hurt the company.
A2 Milk chairman David Hearn says the lack of a daigou channel has hurt the company.
A2 Milk said it remained committed to the daigou infant formula trade into China, despite it being responsible for clouding its short-term earnings outlook.
Daigou, which translated means "buying on behalf of", covers the unofficial group of individuals who shop and send products to China for a profit.
Over thelast three years, the daigou trade in a2 Milk infant formula has developed along corporate lines, with most operators based in Victoria, which has been the hardest hit of any of the Australian states by Covid-19 lockdowns.
At today's "virtual" annual meeting, A2 Milk said it was sticking to its downgraded revenue guidance issued in September, but said the impact of Covid-19 had made forecasting difficult.
It still expects group revenue for the first half of $725 million to $775m, down from $805.3m in the previous corresponding half.
Group revenue for 2021 was expected to come to $1.8 billion to $1.9b, up from $1.73b in 2020.
The 2021 year's ebitda margin was forecast to be in the order of 31 per cent.
"However, due to the volatility arising from Covid-19, and the difficulties this presents with forecasting, naturally there is uncertainty to this forecast," the company said.
"We also acknowledge the outlook provides for a significant increase in revenue in the second half, dependent on a number of key assumptions, including an improvement in the daigou channel and continued growth in our China label business," it said.
Chairman David Hearn said there was no doubt that in the short term the lack of a daigou channel had had a major impact on the company.
"We launched the business through the daigou channel. We build strong relationships through that channel," he told the Herald.
"We supported [daigou traders] heavily throughout the last five years and we have been rewarded with tremendous support from them.
"I remain optimistic that the channel is still relevant. It's not dead, and that our customers are still keen to do business with us," Hearn said.
He added that there had been encouraging signs for the channel since Melbourne came out of lockdown three weeks ago.
A2 Milk's shares last traded at $14.94, down 65c, led by selling out of Australia, where it is also listed.
The company's New Zealand shareholders tend to be individuals while its Australian shareholders are institutions and fund managers.
Mark Lister, head of private wealth research at Craigs Investment Partners said the share price reflected caution about what may lie ahead.
"We like the long-term a2 Milk story but we are a little bit cautious about the short term," Lister said.
"The second half will be a tough one for them and it still feels like there is still a lot of uncertainty in terms of getting things back on track," he said.
"I still feel that the Australian market reaction was the right one," Lister said.
"A2 Milk still stacks up over the long term, but I think the next six months will be quite challenging," Lister said.
Much would depend on how the daigou trade recovers.
"It's been a very profitable channel for them and they have managed it exceptionally well, but at the same time they are reliant on it," Lister said.
"And if they don't get it right, then it is a weakness as well."
A2 Milk said volatility arising from Covid-19 made forecasting difficult.
A2 Milk picked up market share in Australia. Photo / File
"We also acknowledge the outlook provides for a significant increase in revenue in the second half, dependent on a number of key assumptions, including an improvement in the daigou channel and continued growth in our China label business," it said.
A2 Milk said it continued to observe strong trading conditions in China.
"This gives us confidence that, notwithstanding the current headwinds, the fundamentals of the business over the medium term remain sound," the company said.
Chief executive Geoff Babidge said the recent November 11 online sales event achieved 24 per cent English label volume growth compared to the prior year.
The Australian fresh milk brand continued to go from strength to strength, with market share increasing to 11.6 per cent at the end of October.
