A2 Milk gets a shot at redemption with annual result

A2 Milk's new chief executive David Bortolussi. Photo / Supplied

A2 Milk, whose share price has suffered heavily at the hands of four earnings downgrades since last September, gets a chance to restore investors' faith on Thursday, when it reports its annual result.

The dual-listed dairy and infant formula company, which uses milk containing just the a2 beta protein, was once one of the sharemarket's biggest companies.

Today it is worth about $5.1 billion, down from $16b at its peak just over a year ago, reflecting the impact of recent earnings downgrades.

Analysts don't expect a2 Milk's result to vary much from its guidance in May, which pointed to sales of $1.20b to $1.25b.

The mid-point of its forecast ebitda range is $141 million.

They expect a2 Milk's net profit to come in at around $96m, a far cry from last year's net profit of $358.8m.

However, there is a huge variation of opinion as to what the current year to June 2022 may bring.

A2 Milk's downgrades came as a shock to investors who had become accustomed to double-digit revenue and earnings growth, driven by the popularity of the unofficial "daigou" sales channel from Australia to China.

That sales channel has been decimated by Covid-19 restrictions.

Forsyth Barr analyst Chelsea Leadbetter said a2 Milk has had lot going on over the last year, "so people now are asking - where to from here?"

"The new chief executive (David Bortolussi) has been in the seat for six months or so, we may get some insights from him in terms of strategy," Leadbetter said.

She said the market will be looking for updates on whether the inventory writedowns have finished and whether investors safely assume a clean slate.

The big question facing a2 Milk is whether it can recapture the big, double digit-growth rates that propelled the share price to a record $21.51 last year.

Analysts are doubtful.

"It is certainly a lot more difficult today than it was a couple of years ago," Leadbetter said.

Birth rates in China are coming down, despite the Chinese government's moves to encourage people to have more children as it distances itself from its now abandoned "one-child" policy.

The local competition for infant formula has been intense, particularly from the Chinese infant formula giant Feihe, she said.

And the Covid situation has made channels like daigou very difficult.

In infant formula, a2 Milk's English language formula is most likely to have been bought in Australia and sent to China via the daigou channels or through online e-commerce platforms.

The company's China label product is more likely to be sold using more conventional methods, such as China's so called mother and baby stores.

All eyes will be on a2 Milk when it reports its annual result on Thursday. Photo / NZME

The daigou channel has suffered due to the lack of tourists buying up product to take home, and through severely disrupted distribution in ocean freight but the China label side is doing better.

Leadbetter expects a2 Milk's capital management – perhaps in the form of a share buyback – would be key talking point at the result.

But a2 Milk has a lot of work ahead of it to regain its former glory.

"Any company that has been through an aggressive downgrade cycle like this is going to face increased scrutiny and questions because, ultimately, everyone is trying to make sure that downgrade was the last one," she said.

"It's not often that we have seen four downgrades in quick succession.

"There has been a lot of change since that point in time in terms of management – not just the CEO but also the divisional management, so ultimately people are looking for confidence around what sort of growth rates they can return to," she said.

Looking to 2022, there is a $250m spread between analysts ebitda forecasts for 2022, reflecting a higher than normal level of uncertainty.

The average of consensus forecasts for that year is $260m.

The substantial "re basing" of market expectations for a2 Milk appears complete, however, Forsyth Barr's sales channel checks suggested that the company had not turned a corner just yet.

A key area of downside risk would be another round of inventory writedowns.

The swift change in the macro backdrop over the past 12 months broadly reflects there key issues – the sharp decline in birth rates in China, increasing local competition there and the material drop in international student and travel – key to the daigou trade.

"All signs point towards continued macro headwinds near term with it likely at least another 12 months before some of the pressure begins to alleviate," Leadbetter said in a research note.

Looking ahead, Jarden director research Adrian Allbon said much would depend on the intensity of a2 Milk's marketing spend.

The other key point heading into the year will be the integration of is 75 per cent owned Mataura Valley Milk facility, which is expected to initially turn in an ebitda loss.

Allbon expected the focus to go on how the company fared in the fourth quarter just completed, particularly in the severely curtailed daigou trade.

After four downgrades, he said Thursday's result would throw more light on where a2 Milk goes from here.

"It's an opportunity for them to demonstrate that they have got better control over expectations and their ability to forecast," he said.

"All these things dovetail into the health of the a2 brand."