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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

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

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

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.

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Our current favourite New Zealand share .

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

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

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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).

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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.

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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.

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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".

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

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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.

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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

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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

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

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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.

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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.....

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

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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.

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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

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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!"

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

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

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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.

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

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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.

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