A2 Milk shares plummet after cutting earnings outlook

Geoff Babidge, managing director and CEO of a2 Milk, addresses shareholders during their AGM held at the Grand Millennium Hotel. 21 November 2017 New Zealand Herald Photograph by Dean Purcell.

Shares in a2 Milk plummeted after the company took a big knife to its first half and full year 2021 sales forecasts due to disruption arising from the Covid-19 pandemic.

By late afternoon a2 Milk - one of the NZX's biggest stocks - was trading at $11.02, down $3.10 or 22 per cent, and shaving more than $2 billion off its market cap.

The decline was a factor in taking the benchmark S&P/NZX/50 index down 1.77 per cent to 12,661.

A2 Milk's 20 per cent owned supplier, Synlait, saw its share price drop by 25c or 5 per cent, to $4.75 on the back of the downgrade.

In today's release, a2 Milk said it now expects its first half revenue to be in the order of $670m and group earnings before interest, tax, depreciation and amortisation (ebitda) margin to be around 27 per cent.

It now expects full year 2021 revenue to come to $1.40 billion to $1.55 billion and group ebitda margin of between 26 per cent and 29 per cent.

At the end of September, a2 Milk had forecast revenue for the first half of $725m to $775m.

Revenue for the year then was forecast at $1.80 billion to $1.90 billion, with an ebitda margin of 31 per cent.

A2 said in a statement the effect of the disruption in the daigou channel, which represents a significant proportion of its infant nutrition sales in the company's Australia and New Zealand businesses, had proved to be more significant and protracted than previously thought.

"While this has predominantly affected infant nutrition sales, sales in our other nutritionals segment have now also been impacted," the company said.

"We had expected a moderation of the disruption to this important channel during the second quarter. While there has been some improvement, with infant nutrition sales through this channel expected to be higher in the second quarter than the first quarter, the acceleration of the recovery in recent weeks has been slower than we had previously expected."

"Notwithstanding our recent focus on activating the CBEC [cross border e-commerce] channel in a manner which complements our daigou business, the disruption we are experiencing in the daigou channel is now having a more significant impact in CBEC.

The daigou channel plays an important role in stimulating demand across multiple sales channels, including CBEC.

"While our performance in CBEC in the competitive online sales event showed year on year growth, sales in the CBEC channel in the period following that event have been below expectation."

Slower recovery

"With the recent sales performance in the daigou channel not being as strong as previously expected, we now consider that the recovery in this important channel through the balance of the fiscal year will also be slower."

A2 Milk said Covid-19 related travel restrictions would will continue to negatively impact the reseller channel due to reduced travel between Australia and China through the remainder of FY21, with limited prospect of a return of a significant number of international students and tourists to Australia during the period.

The company said it continued to target ebitda an margin of 30 per cent over the medium term.