A2 Milk cuts earnings outlook amid challenging China situation, shares take $2.3bn hit

ASX darling A2 Milk is being savaged by investors, with shares closing 24% lower after a major profit downgrade it says is unrelated to China.

A2 Milk shares have been savaged by investors. Picture: AAP

Dairy brand A2 Milk has blamed the “unprecedented level of uncertainty and volatility in market conditions” caused by COVID-19 for its weaker earnings outlook.

The NZ-headquartered business, which is also listed on the ASX with a market value of $9.9bn, on Friday said full year group revenue would come in between $NZ1.4bn ($1.3bn) and $NZ1.6bn ($1.5bn).

It had previously been expecting to get up to $NZ1.9bn ($1.8bn).

The company’s shares fell 24 per cent to close at $10.14 in response to the news, bringing the market value down to $7.5bn.

Chief executive Geoff Babidge dismissed investor fears that Australia’s trade tensions with China had anything to do with its revision.

“The geopolitical issue while regrettable is not impacting the business as we speak. This is more a consequence of COVID-19,” he said.

China accounts for about 80 per cent of A2’s business with retail and corporate daigous – students, tourists and local businesses buying products from Australian shops and sending them back to China – also supporting sales.

In recent months, international travel bans and the three-month shutdown in Victoria affected December numbers, Mr Babidge said.

“We were tracking broadly to forecast on the year to date numbers to November, but the knock-on effect in December is below our expectations.

“The effect of the disruption in the daigou channel, which represents a significant proportion of our infant nutrition sales in our ANZ business, has proved to be more significant and protracted than was previously anticipated.”

He said recovery in recent weeks has been slower than previously expected.

a2 products are popular with Chinese consumers. Picture: Peter Hemphill

“We expect that COVID-19 related travel restrictions will continue to negatively impact the reseller channel due to reduced travel between Australia and China through the remainder of FY21, with limited prospect of a return of a significant number of international students and tourists to Australia during the period.

“Our internal sales forecasts for both the daigou and the CBEC (cross-border e-commerce) channels for the remainder of FY21 are now materially lower.”

The market has been expecting negative China news, with A2’s share price falling from a high of $20.05 in July to $13.28 before it entered its trading halt on Thursday.

Investors had also expected dairy products will be the next soft commodity China will target in its trade stoush with Australia, which has already led to punitive tariffs or bans on beef, barley, timber, wine and seafood, and now coal, wiping about $20bn of Australia’s Chinese exports.

Geoff Babidge, CEO of A2 Milk. Picture: Hollie Adams/The Australian

“We won’t be directly impacted despite the geopolitical pressure points,” Mr Babidge said, emphasising its China label and NZ business relations were stronger than ever.

It’s on-ground China label sales through Mother & Baby stores were solid with revenue growth for the first half likely to come in 40 per cent stronger than the previous corresponding period.

Elsewhere, its liquid milk businesses in Australia and USA are also likely to do better than in the previous corresponding period.

Key supplier, New Zealand’s Synlait Milk, which manufactures most of A2’s infant formula it sends to China has now entered a trading halt, pending its own impact assessment.

Subject to Australia, NZ and China continuing to manage the COVID-19 pandemic as well as they had, Mr Babidge anticipated the business and broader economies to bounce back in 2021.

Last month, chairman David Hearn said trade is not anywhere near back to where it was before the pandemic, but there was a “flicker of life”.

“We have taken a middle road caution between an optimistic V-shape recovery and pessimistic U-shape recovery.”

Originally published as A2 Milk cuts earnings outlook amid challenging China situation, shares take $2.3bn hit