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Covid-19 set to break a2 Milk’s record run

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More than $2 billion was shaved off a2 Milk’s market capitalisation after the company signalled that its enviable record of strong sales growth looked likely to come to an end in the 2021 financial year due to impact of Covid-19 on the daigou trade channel to China.

By the close, a2 Milk – which is often the subject of short selling pressure – was down $3.12, or 22 per cent, at $11.00 – after going into a trading halt on Thursday.

A2 Milk is one of New Zealand’s biggest companies by market cap, so its decline was a factor behind the sharemarket’s S&P/NZ50 index falling by 1.8 per cent on the day.

The company’s 20 per cent-owned infant formula supplier, Synlait, saw its share price slide on the back of the downgrade.

Synlait went into a trading halt while it considered the impact of a2 Milk’s announcement, which is likely to have inventory implications for both companies.

In its release, a2 Milk said it now expects its first half revenue to be in the order of $670m and group earnings before interest, tax, depreciation and amortisation (ebitda) margin to be around 27 per cent.

It now expects full year 2021 revenue to come to $1.40 billion to $1.55 billion and group ebitda margin of between 26 per cent and 29 per cent.

At the end of September, a2 Milk had forecast revenue for the first half of $725m to $775m.

Revenue for the year then was forecast at $1.80 billion to $1.90 billion, with an ebitda margin of 31 per cent.

A2 Milk’s announcement will come as a rude shock to shareholders, who have become accustomed to annual double-digit earnings and sales growth for several years.

The company has been signalling since August that the business was feeling the negative impact of Covid-19, despite getting an initial boost in China as people stocked their pantries for Covid-19 lockdowns there.

Babidge said trading had been tracking close to forecast until December when it became clear that it would miss its sales targets.

“It’s the knock-on effect of the disruption of the daigou channel out of Australia, which was exacerbated by the Melbourne lockdown, and the whole issue of restricted travel,” Babidge told the Herald.

a2 Milk had been expecting an improvement by this time of the year.

“The reality is that our second quarter sales were higher than the first quarter but not by as much as we were initially assuming,” he said.

“That changed the trajectory going into the second half.”

Daigou, which translated means to sell on behalf of, has been a key platform for a2 and is essentially the main reason for its success.

“Realistically, it is still a very important channel for us and the reality is it is not coming back as quickly as our assumptions, and that’s likely to continue into the second half,” he said.

About 40 per cent of a2 Milk’s Australia-labelled infant formula incorporates daigou.

Babidge said a2 Milk now had to carefully manage its infant formula inventory, which it had deliberately built up over May, June and July, to try to offset any possible Covid-related supply problems.

“The reality is that we are dealing with a very unusual, unprecedented event, which we are trying to navigate through,” he said.

“This company has moved over a number of bumps in the road in respect of how it has developed. We have got a very strong brand and executive team has navigated through significant challenges,” he said.

Babidge said the poor performance over December was not related to worsening diplomatic and trade relations between Australia and China, given a2 Milk is based in Sydney.

“That is not an issue that is playing into this,” he said.

“It’s all very much about Covid.”

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