a2 Milk Company shares shredded after yet another profit downgrade

Business

One time glamour stock a2 Milk Company has announced massive stock write-offs for the year of over $100 mln and slashed its earnings guidance

10th May 21, 11:01am by David Hargreaves

Shares in a2 Milk Company (ATM) are being battered on the share market after the one time glamour stock issued its fourth earnings downgrade for the financial year ending in June.

At time of writing the share price had lost nearly a fifth of its value since the market open on Monday. It was trading down $1.48 (-19.5%) at $6.11. (Later the price recovered to about $6.70, but still down around 12%.)

This made the whole company worth about $4.5 billion. About a year ago it was worth a touch under $16 billion.

The company's now talking about revenues this year of possibly as low as $1.2 billion - after originally this year looking at close to $2 billion.

Pre-tax operating earnings (EBITDA), which came in at around $550 million in the June 2020 year, could be as little as $130 million for the current financial year - based on the company's new estimate of a 'margin' of 11%-12% of revenue converted to operating earnings.

The company, which has struck real difficulties with its informal trading channels, particularly to China, has said it is going to write-off up to $90 million of inventory (presumably simply unsold stock), which is on top of $23 million of write-offs of stock in the first half of the year.

"As a result of the inventory review, it is clear that the challenges in the daigou/reseller and CBEC channels have been exacerbated by excess channel inventory and difficulties with visibility," the company says.

"...Rebalancing inventory by further reducing sell-in to the daigou/reseller and CBEC channels will need to continue for the rest of 4Q21 and this may continue into 1Q22. This is also aimed at reducing customer and distributor inventory to target levels. While this is necessary to restore the overall health of these channels, it will result in significantly reduced sales for FY21."

a2 says the latest write-off "includes costs to dispose of excess inventory in a controlled and sustainable manner".

And this may not be the end of the bad news.

The company says it will "take some time to rebalance inventory levels and restore channel health".

"An immediate recovery is not expected and a further update for FY22 will be provided at the Company’s results in August."

a2 says its balance sheet remains strong and the board "is confident in the strength of the brand, the underlying fundamentals of the business, and the company’s long-term growth potential".

A potential share buy-back is being considered. There will be an update be provided on that at the full year results in August.

In a separate announcement a2 said Peter Nathan had resigned from his role of Chief Executive Officer Asia Pacific.

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24 Comments

by Te Kooti | 10th May 21, 11:50am 1620604244

A fourth earnings downgrade within 12 months and a 75% fall in market cap in one of our largest company's/unicorns and not a single comment.

by Cowpat | 10th May 21, 12:08pm 1620605293

Our current favourite New Zealand share .

by ex agent | 10th May 21, 12:28pm 1620606503

Mainfreight is the current darling Cowpat. It will be up around the $100 mark in the next year or so.

by Cowpat | 10th May 21, 2:24pm 1620613442

Certainly not a day for white gold as Iron ore goes orbital

by kiwikeith | 10th May 21, 12:35pm 1620606920

You have to wonder how a company with annual sales of just over the billion dollar mark could have been valued at $16bn (one year ago).

by fortunr | 10th May 21, 1:06pm 1620608768

Exactly, the fundamentals were completely out of synch with such ridiculous valuation. The current valuation around the 4.5 billion dollar mark is much more realistic (albeit possibly a bit on the high side), and it makes it almost a stock worth buying.

by Independent_Observer | 10th May 21, 1:31pm 1620610279

From memory the P/E was in the 60-80 range a few years ago and I was thinking this has to be a bubble. Sure enough...

Yahoo reporting P/E now 15 based on TTM data. Looks like a much more attractive buy than it was for the last few years.

Those who purchased at $0.50 and sold around the $20 dollar mark would have made a killing over those few years.

by kiwikeith | 10th May 21, 4:57pm 1620622678

Yes my wife has derided me for the last couple of years for not buying A2 shares. I kept saying it is too expensive and she would reply "but you have been saying that for ages and it keeps going up".

by Carlos67 | 10th May 21, 1:00pm 1620608430

No idea why A2 would fly anyway, to many people now cannot even afford the budget milk let alone this stuff.

by mfd | 10th May 21, 1:15pm 1620609338

If you believe the evidence Keith Woodford has collated, which I do, the only real choice is between A2 milk or no milk. Regular milk is strongly correlated to many conditions (diabetes, heart disease, autism etc) and I do my best to avoid it. I certainly wouldn't want my kid drinking it.

Whether the company succeeds long term or not they have done the world a favour drawing attention to this issue.

by gnx | 10th May 21, 1:47pm 1620611269

yes very interesting to read his recent article a few weeks back and realise Fontera could have made transitioned its entire herd to A2 years ago and create a strategic competitive advantage...(if i read that correctly)

how may NZ companies lose sight of the customer and focus on the dollars...sigh

by keithwoodford | 10th May 21, 1:59pm 1620611984

Thanks mfd,
There are now multiple suppliers of A2 milk and A2 infant formula in NZ. And it has been moving from brand to a category. Goat and sheep products are also A2.
My criticism of The a2 Milk Company for quite some time is that they have focused on their own brand via marketing as their close to exclusive focus. There are no scientists in the senior team. But if your brand depends on a differentiated category, and if you are the lead company in that category, then you need to also keep working on the scientific underpinnings to make sure the category continues to grow. Many people may not understand the science but they need the comfort of knowing that the science does exist.
KeithW

by Fluffybunny | 10th May 21, 4:41pm 1620621718

Just skip milk altogether. Soy, oat, almond. We are predominantly plant based now (aside from cheese and the occasional sneaky whopper...)

by Carlos67 | 11th May 21, 10:29am 1620685788

Been drinking the stuff since age 5 at school in the UK. It used to get handed out for free in the mornings in cream sized bottles with a straw. Very fond memories of having to wait for it to warm up before I could drink it. Then again we used to have full cooked school lunches as well. How things have slowly gone down the toilet since the 1970's. Now it would appear that people are scared to even drink normal milk, what's next are Eggs bad again ? Perhaps if we stopped processing the hell out of all the food we wouldn't have as many health issues as we do now. The world has gone mad, in a quest to make things better we have made it worse.

by Henry_Tull | 10th May 21, 1:26pm 1620609999

The company, which has struck real difficulties with its informal trading channels, particularly to China,

This is folk buying formula from supermarkets in Auckland or Sydney and posting the can & supermarket till receipt to China....

No one needs a business model like this....

Trade with China, basis commodity spec. Is tolerable, think of it as food aid.
Everything else is proving to be fake, pie in the sky wishful thinking....
Dreamers with a spreadsheet.....

by 7jai | 10th May 21, 2:13pm 1620612831

The power of Chinese consumers. No wonder NZ Govt is careful on what they say with China vs. 5 Eyes.

by Henry_Tull | 10th May 21, 4:22pm 1620620561

How so?
The CCP makes sure branded product have no access to "consumers"

Think of the shocks Synlait has had with its brands. Consider the trading margin of the China owner processors.
Nothing symmetrical there.

by keithwoodford | 10th May 21, 5:53pm 1620625985

Synlait's brands are B2B - they process and package for others. This year they have been caught with inventory issues particularly for their A2. But none of this relates to decisions by the Chinese Government blocking access to consumers.
KeithW

by Tom Valen | 10th May 21, 6:14pm 1620627275

Yet another troubling sign from the NZ economy. If you are minting it from the great NZ property Ponzi / housing crisis, then perhaps you are doing well. You will likely be an Aussie bank, a boomer, a landlord, a real estate agent, or a motel owner. But when you think of the wider economy, there is plenty of indicators out there that something is rotten in the state of New Debtland. But I see Robbo is pointing as his mountain of borrowed cash and saying "Aren't we doing well!"

by Te Kooti | 10th May 21, 4:29pm 1620620951

You couldn't help yourself could you. We need a Godwins Law for the housing market/ponzi.

by Tom Valen | 10th May 21, 6:15pm 1620627330

We can’t pretend the housing crisis doesn’t exist mate. Labour had been doing it for far too long.

by CWBW | 10th May 21, 7:16pm 1620630961

What crisis? There isn't one to begin with.

65% of households are owner occupiers with the remainder 35% consisting of happy renters and FHBs, FHDs and those on the dole. On top of that, there are more houses than the number of average households in this country.

The term "Housing crisis" sounds like a dog whistle.

by CWBW | 10th May 21, 7:18pm 1620631082

I think the business model of A2 milk has broke in partly due to the pandemic.

by girty | 11th May 21, 9:03am 1620680599

Crazy world. According to a commentator A2 will resupply channels with fresh product(old stock still has 1 year use by date to go) and destroy old stock. So much for feeding the world NZ. Maybe if we gave it to those starving in the world they would be able to help themselves more.