a2 Milk reports it first half result on Monday. Photo / File
a2 Milk reports it first half result on Monday. Photo / File
A2 Milk, which reports its first half result on Monday, rallied sharply after its sole supplier, Synlait, gave a progress report on the registration process that it is required to go through to produce infant formula for China.
Synlait, which is about 20 per cent owned by a2 Milk, gavean update on the new national standards (GB) registration process for a2 Milk’s China label infant milk formula products.
As part of the registration, the Ministry for Primary Industries will commence the audit process of Synlait’s Dunsandel facility on behalf of China’s State Administration for Market Regulation (SAMR) next week.
Successful registration in China - by far the world’s biggest infant formula market- is vital for both a2 Milk and Synlait.
By early afternoon, a2 Milk had gained 46 cents to $7.78 while Synlait had rallied by 14c to $3.55.
“[Synlait] are finally going to get onsite auditors into the factory to kick a few tyres, which is great,” Harbour Asset Management analyst Oyvinn Rimer said.
“For all the analysts out there, this is what has been expected - and it is consistent with the information from a2 Milk and Synlait.
“There is some relief in knowing that it is finally going to happen,” he said.
A2 Milk is recovering after Covid-19 hit earnings. Photo / File
The registration, which will replace Synlait’s soon-to-expire licence, is expected to take about three or four months.
Adrian Allbon, director, equity research at Jarden, said Synlait’s update was timely.
“Overall, we saw the announcement from Synlait today as providing procedural comfort a2 Milk is on track to gain SAMR approval under the new GB food standards at some point,” he said in a research note.
“Timing remains an open question and one which in our view is not reflected in the current a2 Milk share price,” he said.
Analysts expect a2 Milk, which toppled from its place as New Zealand’s biggest stock by market capitalisation over 2020 and 2021 due to Covid-19, to report a strong first-half result on Monday, led by its China-label infant formula business.
A2 Milk’s troubles began when the all-important “daigou” trade, which involves individuals and businesses buying infant formula in Australia and sending it to China, came to a halt when Covid closed borders.
The upshot was that both Synlait and a2 Milk were left with tonnes of unsold infant formula, which weighed heavily on both stocks and their respective earnings.
These days Rimer says it looks like a2 Milk is doing well in China’s so-called mother and baby stores, but not so well in the supermarkets and hypermarkets.
All the infant formula makers face challenges in China due to a sharply declining birth rate and more stringent regulations.
The big question lay around the success of English label product, which lands in China via the cross-border e-commerce channels as opposed to the more conventional export channels that apply to the China-label product.
“It looks like they are taking market share but the [infant formula] market is declining at a very rapid rate,” he said.
“On the stuff that they can control, it looks like they are doing well, but the external factors outside their control look like hard yakka,” he said.
The once highly influential daigou trade in infant formula from Australia to the PRC is a mere shadow of its former self and is not seen as returning to pre-Covid levels.
Rimer said a2 Milk was still in recovery mode after going through a tough time since the beginning of Covid, but he said more “meaningful” growth was on its way.
Brokers Forsyth Barr expects Monday’s result to show solid growth across the board, driven by the inventory rebalancing that took place in the first half.
Forsyth Barr sees a first-half net profit of $68.4m, up 22 per cent from the $56m reported for the first half of 2022.
a2 Milk managing director and chief executive David Bortolussi. Photo / Supplied
The broker expects revenue to hit $789.7m, up 20 per cent on the $660.5m reported in the prior comparative period.
The well-cashed-up a2 Milk is expected to comment on its balance sheet, and plans for more capital expenditure.
The infant formula marketer has a three-quarters stake in Mataura Valley Milk, and intends to further develop the facility.
Forsyth Barr has forecast full-year 2023 ebitda of $218m (consensus; NZ$226m) versus 2022′s ebitda of $196m.
A2 Milk last November said it expected “low double-digit” revenue growth and ebitda margins in 2023 “to be similar” to 2022.
“Recent data has been solid (but unspectacular) and we expect a guidance reiteration,” Forsyth Barr said.
