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Home / Business / Markets / Stock takes

Stock Takes: Milk firms' shares slip after stellar run

Jamie Gray
By Jamie Gray
Business Reporter·NZ Herald·
9 Nov, 2017 06:52 PM4 mins to read

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A2 Milk and Synlait stocks received a boost when, in September, Synlait received registration to allow exports of A2 Milk infant formula to China to continue. Photo / Paul Estcourt

A2 Milk and Synlait stocks received a boost when, in September, Synlait received registration to allow exports of A2 Milk infant formula to China to continue. Photo / Paul Estcourt

It had to happen some time.

A2 Milk and its affiliated supplier, Synlait Milk, have seen their share prices plummet after a stellar run.

Both stocks received an added boost when, in September, Synlait received registration to allow exports of A2 Milk infant formula to China to continue.

Formula manufacturers are required to register brands and recipes with the China Food and Drug Administration in order to sell their products in China from January 1.

The changes are expected to shrink the number of brands to 500 from about 2000 at present, theoretically putting A2 Milk and Synlait in the box seat.

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At its peak of $8.75 in October, A2's price represented a 360 per cent gain over the previous 12 months. Synlait - which peaked at $8.26 - had put on a gain of 174 per cent over the same period.

After a week of furious trading, A2 Milk closed yesterday at $7.57, while Synlait finished at $6.84 - down 7.1 per cent and 14.5 per cent respectively for the week so far.

Harbour Asset Management portfolio manager and analyst Shane Solly said volatility is to be expected after stocks rack up those sorts of gains.

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"A2 has had a really good run," he said. "In our view, we still see potential for ongoing growth, but it is reasonable to expect some volatility in the share price after such a strong performance."

The former New Zealand-owned company Lion - now owned by Japan's Kirin - has fallen foul of A2 Milk over labelling and the two are heading to the Australian Federal Court later this month to settle the issue.

The case relates to a claim on Lion's packaging that Pura and Dairy Farmers branded milk "naturally contains A2 protein".

A2 Milk said it is confident of achieving a successful outcome.

November is shaping up to be a busy month for the company.

The company has a history of issuing earnings upgrades, so attention is focusing on what will be revealed at its annual meeting, which will be held on November 21.

Up sticks
As reported in The Business today one of the sharemarket's biggest success stories - Xero - is set to up sticks and make Australia its primary listing.

The cloud-based accounting software firm said it would keep its headquarters in Wellington but would delist from the NZX and consolidate its listing on the ASX to encourage a broader range of analyst and broker coverage and increase its relevance to a more diverse range of large investors.

Xero said the move - which will take effect from February 2 - was in the best interests of the company and its shareholders.

Xero's been up there with A2 Milk in terms of its stellar performance. Both were relatively unloved in their early days, spending a lot of time trading beneath their issue prices before gaining traction.

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It's been a wild ride for Xero. After raising $15 million through an initial public offer, the shares were issued at $1 and listed in June 2007 at a 15 per cent premium.

In the ensuing years the stock struggled, trading well below its issue price before Xero fever took hold, driving the stock up to a peak of $44.98 in October 2014 before dropping to just over $14 a year later.

Analysts are still scratching their heads as to what caused the company to lose more than half its value in just a year, but it has nevertheless resumed its uptrend.

Like A2 Milk, it's been a difficult one for them to put a hard and fast valuation on, particularly as Xero is yet to report a profit.

Rickey Ward, NZ equity manager at JBWere, said it looked like Xero's move was aimed at attracting Australian funds, specifically those with Australia-only mandates.

"It was a surprise to the market - people would not have expected that."

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Equally surprising was Xero's decision to delist from the NZX completely and not retain a secondary listing in New Zealand, as many do.

"It's a huge disappointment to see companies delist," he said. "We don't need that."

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