A bad day Wednesday for Kiwi dairy groups Synlait Milk
(ASX:SM1) and A2 Milk
(ASX:A2M) as both came under pressure from nervy investors.
Synlait triggered the nervousness with a surprise downgrade, which spread to the shares of A2Milk because of their commercial relationship.
Synlait shares tumbled more than 26% to record lows on both side of the Tasman – $NZ1.56 in NZ and $A1.44 in Australia. A2 shares were off more than 5% at $5.42.
Wednesday’s announcement saw Synlait cut its 2022-23 season base milk price forecast and its 2023 profit outlook for a second time in a month, blaming weak demand and poor dairy commodity prices for the worse than expected performance.
“The slower-than-expected Chinese recovery and a negative shift in sentiment towards the broader global economy have resulted in falling commodity prices, underpinning Synlait’s decision to reduce its forecast,” the company said.
The company now expects a range between net loss after tax of $NZ5 million and a net profit after tax (NPAT) of $NZ$5 million for 2023 as a dent in demand, higher financing and supply chain costs ate into earnings.
A month ago in late March, Synlait forecast lower net profit after tax in the range of $NZ15 million to $NZ25 million for fiscal 2023 due to weakening demand and higher costs.
But the factors have worsened, according to Wednesday’s statement, especially weaker demand in China and higher finance and supply chain costs.
Synlait said demand reduction from one of its customers affected consumer-packaged infant formula volumes and base powder production leading to an after-tax impact of $NZ16.5 million in 2023.
The company, which exports most of its milk products, largely relies on international milk prices, which have been mixed-to-weak for much of this year (though there was a 3.2% rise in the Global Dairy Trade Index auction a fortnight ago.).
Synlait reduced its forecast base milk price to $NZ8.30 per kilogram of milk solids (kgMS) from the earlier forecast of $NZ$8.50 per kgMS.
So what was the impact on A2?
A2 told the ASX in a statement that, given the comments from Synlait, they would be lowering total forecast production volume needs for English label consumer-packaged infant milk formula by ~1,650 tonnes for the June quarter.
There were three reasons for this reduction. These are significant daigou weakness (daigou are people who buy product in Australia and ship it into China outside normal distribution channels), inventory build-up, and distribution model adjustments. It explained:
“This is mainly due to: continued weakness in the ANZ daigou/reseller market which is down 49% in the most recently reported quarter from Kantar, A2 explained.
On top of this there was “the impact of significant cumulative delays in English label consumer-packaged IMF deliveries from Synlait to a2MC over an extended period expected to be fulfilled in 4Q234 resulting in a material amount of inventory arriving within a relatively short period which needs to be managed.”
“And ongoing refinement of the Company’s English label distribution model resulting in more customers and distributors being supplied directly out of Hong Kong and China leading to lower future a2MC and channel inventory requirements.”
The financial impact on A2 seems to be smaller than on Synlait.
A2 said in its statement that “taking all of the above factors noted by the Company into account, a2MC confirms that there is no material change to its FY23 outlook as confirmed at the time of the announcement of its 1H23 results on 20 February 2023. “
“The Company maintains its FY23 revenue guidance of low-double digit percentage growth on FY22, but notes that English label IMF revenue is now expected to be down mid-single digits partially offset by continued strong double-digit growth in China label IMF revenue.
“As a result, the Company expects revenue growth to be at the low end of its previous expectations (ie approximately 10%). The Company continues to expect an EBITDA margin (% of sales) similar to FY22.” That was 13.6%.
Without raising the question, A2 left analysts wondering about the impact on 2023-24 of rising inventories and weak sales through a key sales channel.
