A2 Milk has reported a 7.7 per cent increase in net profit. Photo / NZME
A2 Milk has reported a 7.7 per cent increase in net profit. Photo / NZME
A2 Milk’s share price took a hammering despite the infant formula company reporting a 7.7% lift in net profit to $167.6 million for the June year.
The increase in the infant formula company’s bottom line profit took place against the background of difficulties in its market, China, where thebirth rate is in sharp decline.
Market expectations were for a2 Milk to report a net profit of about $172m for the year from $155.6m in the previous year.
Earnings before interest, tax, depreciation and amortisation (ebitda) rose by 6.9% to $234.3 million, with an ebitda margin of 14.0% – up 0.2 percentage points.
A2 Milk’s closing cash position was $968.9m, up $211.7m on the figure a year ago.
While the numbers were strong, the stock was singled out for selling as the outlook for 2025 was less bullish than market expectations.
By late afternoon a2 Milk, which so far this year has had a very strong run, was down $1.36 or 17.6%, at $6.37.
Mohandeep Singh, senior research analyst at Craigs Investment Partners, noted the guidance was for mid-single-digit revenue growth, and that margins would be flat.
“It looks like a 10% miss versus market expectations for 2025 ebitda,” he said.
“The question the market will now turn its attention to is if the guidance for 2025 is conservative or fair,” he said.
Jarden analysts said a2 Milk’s core infant milk formula performance was “impressive in our view in a difficult end market”.
The investment firm said it was encouraging to see the strong growth of the a2 category continuing.
“The key issue will be outlook downgrade relative to expectations, with supply constraints impacting across the first half of 2025.
“Also, no further strategic update on supply chain priorities, outside joint a2 Milk, Synlait announcement on Friday.”
A2 Milk chief executive and managing director David Bortolussi.
A2 Milk has earmarked its cash mountain for supply chain development, yet the result did not reveal much detail on that score.
On Friday, cash-strapped Synlait and a2 Milk settled a string of disputes, including Synlait’s acceptance of the validity of a2 Milk’s notice of cancellation of exclusivity, subject to Synlait completing its equity raise and the refinancing of its existing banking facilities.
Cash-strapped Synlait, a2 Milk’s main supplier, has been working on a capital raise which a2 has agreed to support.
A2 Milk chief executive and managing director David Bortolussi said he was “very conscious” of the amount of money on the company’s balance sheet.
“The reason we are keeping that is in connection with our supply chain transformation strategy, which may require significant investment in the future,” he said.
“That’s still a work in progress at the moment,” he said.
A2 has a majority interest in the Mataura Valley Milk (MVN) facility in Southland.
MVN’s loss narrowed to $20m in ebitda from a loss of $26m a year earlier.
A2 Milk enjoyed meteoric growth in the early days, thanks to the informal “daigou” trade-in formula between Australia and China.
However, Covid-19 brought that market to a screeching halt because of travel restrictions.
Bortolussi said a2 Milk’s business is now completely different to its pre-Covid days.
Daigou, which involves individuals buying product off shop shelves for resale in the PRC, is now just 7% of a2′s sales.
Similarly, English label product, once the mainstay, has been supplanted by China label product.
Bortolussi said the entire market in China had gone through a transition over the past 12 to 18 months because of a new “GB” standard, which had been a challenge for all players.
“Macroeconomic conditions in China, like many other countries around the world, are difficult,” he said.
“We are hopeful that there will be growth in birth rates over calendar 2024 due to the delayed recovery from Covid and the year of the dragon.”
“There has been a huge transformation in the market – a market-wide transition from an old GB standard to a new GB product regulated market.”
“So far we have been able to drive absolute growth in infant formula business and have achieved significant improvements in market share.”
The company grew total infant formula sales by 4.6% despite a challenging China formula market that was down 10.7% in value.
“After several years of Covid-19-related disruption and market decline, we are pleased that our English label IMF sales stabilised in the first half and grew 6.9% in the second half,” Bortolussi said.
“But we are swimming against the tide – market and category conditions are very challenging.”
-- Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
