Saturday, December 2, 2023

Slow road back to full health for a2 Milk

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Alternative dairy company still recovering from covid lockdowns, when infant milk formula sales slumped and a key sales channel into China collapsed.
A2’s share price surged 7% on the day the US legislation over tarrifs was announced.
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A2 milk increased its net profit by 26% to $144.8 million in the 2023 financial year – as  the Chinese infant formula market declined because of fewer babies and lower product prices.

China accounts for 70% of a2 Milk’s sales and revenue, which was up 10% to $1.592 billion.

The outlook for FY2024 is a double-digit decline in the China infant formula (IMF) market but a2 Milk expects to deliver a low single-digit revenue growth and a gross margin similar to last year.

The alternative dairy company is still recovering from the covid lockdowns between 2021 and 2023 when IMF sales slumped and the parcel-post “daigou” sales channel from Australia and New Zealand to China collapsed.

Managing director and chief executive David Bortolussi said he is proud of the team effort behind 10% sales growth when the core market, IMF in China, declined by 14%.

China-label sales exceeded English-label sales for the first time and total IMF sales were $1.1bn.

The daigou sales of English-label IMF fell by 40% and a2 Milk has turned to channels over which it has more control.

“The China IMF market has become increasingly challenging as a result of lower birth rates and increased competitive intensity.

“Notwithstanding, we are well positioned to continue to invest and grow share in FY24 to emerge in a stronger position when the market recovers.”

The Mataura Valley Milk processing subsidiary made a larger earnings loss of $26.5m, compared with $18.8m in FY22, with revenue of $114m.

The a2 share price dropped nearly 50c after the results were published, now down in the range $4.80 to $4.90, the lowest level since early 2022, when the full covid impacts first became apparent.

In recent times the price peak has been around $7.40, so clearly the share market is not yet convinced that the a2 pathway to profitability is sustainable.

Pre-covid a2 Milk had peak revenue of $1.7bn and peak profit of $386m.

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