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NZX trading halt clouds a2 Milk’s earnings outlook

3 min read

A2 Milk’s move to request a trading halt on the New Zealand and Australian stock exchanges has analysts scratching their heads, but it appears likely that an earnings downgrade is in store.

The alternative milk company – one of New Zealand’s biggest by market cap – asked for, and received, a trading halt, which it said could last until Monday.

Analysts were perplexed about the time lag – most earnings downgrades happen immediately once a material difference between reality and earnings guidance comes to light.

In its statement, a2 Milk said: “We have become aware of information which may require us to release an announcement to revise our previously issued guidance to the market.

“We are requesting a trading halt to provide us with additional time to properly consider the current information and to consider new information as it becomes available, and inform the market.”

Craigs Investment Partners head of private wealth research Mark Lister said a2 Milk’s announcement had left the market guessing.

“I would say that, almost certainly, a negative announcement is coming.

“It is difficult to produce or quantify the nature of that, or what it will be,” he said.

A2 Milk has in the past said that prolonged Covid-19 lockdowns in Melbourne- an important city for the unofficial daigou trade to China – had been a problem in 2020.

“So one would think that it will be something related to the daigou channel not performing to the degree that they would hope.”

Craigs’ house view was that another earnings downgrade was likely before the company reports its first-half result in February, due to ongoing issues with daigou.

“Everyone is guessing,” Rickey Ward,New Zealand equity manager at JB Were, said.

People are expecting a downgrade, and there has to be some accuracy about it being a volume-led issue,” Ward said.

“It’s not good news by the looks of it, but one will have to wait and see.”

Synlait Milk’s share price nose-dived by 40c or 7.4 per cent to $5.00 on the back of a2’s Milk’s trading halt.

Canterbury based Synlait – just under 20 per cent owned by a2 Milk – is a2 Milk’s sole supplier of infant formula. A2 Milk is Synlait’s biggest customer.

In a separate statement, Synlait said: “Once an announcement is released by The a2 Milk Company, Synlait will assess this information, and the impact on its own company, and provide a further update to the market if necessary.”

In its last result for the year to July, Synlait said there had been a 63 per cent increase in inventory to $269.4m – partly driven Covid-19 related disruption to trade.

At November’s annual meeting, a2 Milk said it still expects group revenue for the first half of $725 million to $775m, down from $805.3m in the previous corresponding half.

Group revenue for 2021 was expected to come to $1.8 billion to $1.9b, up from $1.73b in the 2020 financial year.

The 2021 year’s Ebitda margin was forecast to be in the order of 31 per cent.

“However, due to the volatility arising from Covid-19, and the difficulties this presents with forecasting, naturally there is uncertainty to this forecast,” the company said at the time.

At the annual meeting, the company said it remained committed to the daigou infant formula trade into China, despite it being responsible for clouding its short-term earnings.

Daigou, “buying on behalf of”, covers the unofficial group of individuals who shop and send products to China for a profit.

Over the last three years, the daigou trade in a2 Milk infant formula has developed along corporate lines, with most operators based in Victoria – the hardest hit of any of the Australian states by Covid-19 lockdowns.

Before the trading halt, a2 Milk shares traded at $14.12, having dropped by 7.11 per cent over the last 12 months.

In its last result for the year to July, Synlait said there had been a 63 per cent increase in inventory to $269.4m – partly driven Covid-19 related disruption to trade.

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