A2 Milk's profit may slump 75% this year after daigou market dries up

Wednesday, 12 May 2021

Covid-19 has shut down the informal daigou market for a2 Milk’s infant formula products into China.

The a2 Milk Company’s profit may slump 75 per cent this year to a four-year low after one of its key sales channels to China dried up due to the Covid-19 pandemic.

Brokerage Forsyth Barr expects a2 Milk to make a profit of $97.5 million in the year to the end of June, down from a record $385.8m last year and the lowest profit since 2017 when it made $90.6m.

About $11 billion has been wiped off the company’s value since it reported its record profit in August last year. Since then, it has had four downgrades after informal cross-border selling into China, known as the daigou market, was shut down due to Covid-19, a market that was pulling in about $250m of revenue a year.

On Monday, the company revealed plans to destroy dated infant formula inventory and slow down sales to help reduce an oversupply of product in the market. It lowered its expectations for revenue for this year to between $1.2b and $1.25b, from its $1.4b forecast in February and $1.73b last year.

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“A2 Milk is taking greater corrective action at the expense of short-term profit,” Forsyth Barr analysts Chelsea Leadbetter and Matt Montgomerie said in a report titled An Udder Downgrade.

While a2 Milk had a number of redeeming features, including a strong cash position and a highly-regarded brand, the hit to profits and future growth “has been rapid and painful,” the analysts said.

The company was also facing risks from a lower Chinese birth rate, down 15 per cent in 2020, and increased competition, the analysts said.

“There are many unknowns, with recent announcements a stark reminder visibility is low and there is a high margin of error in earnings forecasts,” they said.

Forsyth Barr’s new profit expectation for this year is 58 per cent lower than its previous forecast of $231.6m. The brokerage has also lowered its forecast for next year by 27 per cent to $197.9m, and its forecast for 2023 by 32 per cent to $241.8m.

The brokerage cut its target price for the stock by 32 per cent to $7.50.

Shares in a2 Milk slipped 0.3 per cent to $6.17 in mid-morning trading on the NZX, taking its slide so far this week to 19 per cent.