A2 Milk received a harsh lesson in meeting market expectations today when its shares were sold down sharply, despite the alternative milk company reporting sales forecasts that most companies can only dream of.

The stock - the NZX's biggest by market capitalisation - at one point fell by as much as 21.75 per cent to a low of $10.25, despite reporting a 70 per cent lift in revenue for the nine months to March 31 to $660 million.

By the close of trading a2 Milk had recovered some ground to finish at $11.36, down 13.28 per cent for the day.

The company said it was anticipating revenue in a range of $900m to $920m for the 12 months ended June 30, which would compare to last year's actual number of $549m.


A2's "crime" was that its sales forecast for the year fell about 4 per cent below market expectations of around $950m and the stock was savagely sold down as a result.

Harbour Asset Management senior research analyst Oyvinn Rimer said several other growth stocks - particularly ones like a2 Milk that trade on high-price-to-earnings multiples - had seen their share prices drop over the last six months after issuing guidance that failed to match optimistic market expectations.

"When they don't meet market expectations, they get a caning by the market," he said.

A spokesman for a2 Milk said the company had become aware of some overly bullish revenue forecasts and had moved to clarify what its view was.

The company's more modest revenue expectation was based on the possibility that a planned labelling change may have an impact on sales, he said.

A2 Milk managing director and chief executive Geoff Babidge at last year's annual meeting. Picture/NZ Herald.
A2 Milk managing director and chief executive Geoff Babidge at last year's annual meeting. Picture/NZ Herald.

Harbour's Rimer said that had it not been for the rebranding, a2 Milk's projection would have beaten market expectations "handsomely".

"The fear is with some of these high growth stocks is that once they stop printing these big performance numbers that the show is over," he said.

"But what we have seen here is that they are already doing 70 per cent better than [this] time last year, so that is a massive growth number," he said.


Harbour is a significant shareholder in a2 Milk.

In its statement to the NZX, a2 Milk said its gross margin percentage for 12 months to June 30 is expected to remain broadly consistent with the first half of the financial year, given the benefit of throughput efficiencies and currency movements.

Could drinking a2 milk help lactose intolerant people digest dairy long-term? / Supplied by Liggins Institute & AgResearch

The group's total marketing investment is now expected to be in the range of $82m to $87m for the full year, given higher expenditure primarily in the US and China businesses in the second half compared to the first half.

A2's Milk's share price was sold down to a similar degree in March when news broke that international food giant Nestle had launched an A1 beta free infant formula in China, and today's price action may have been linked to that, said Devon Funds Management's managing director Slade Robertson.

"The announcement by a2 Milk today highlights that the competitive environment for this business has deteriorated as evidenced by the additional spend that it requires for marketing their product in China," Robertson said.

The selloff in a2 Milk was enough to drag the entire market down with it, the S&P NZX 50 Index finishing at 8556, down 1.76 per cent.

Even after today's fall, a2 Milk has still had a spectacular run, with the stock having traded this time last year at just $3.56.

Most cows produce the A1 and A2 versions of beta-casein protein, but about 30 per cent of the world's herd produces just the A2 variety.

A2 Milk believes that the A2 beta-casein protein milk is better for people, particularly those who have trouble digesting milk.

The company has enjoyed success in the Australian fresh milk market, where it now has about 10 per cent market share, and in the lucrative infant formula market in China.

In February, dairy co-operative Fonterra said it had formed a strategic alliance with a2 Milk, which led to a sharp rise in a2's share price at the time.