A2 Milk's outgoing chair, David Hearn. Photo / NZ Herald
A2 Milk's outgoing chair, David Hearn. Photo / NZ Herald
Shareholders hoping for a piece of a2 Milk’s cash mountain could be left disappointed as the infant formula marketer looks to be heading towards an acquisition rather than a capital return.
Outgoing chairman David Hearn came under fire at last week’s annual meeting for the company’s share price – currentlyat around its lowest point since 2017 - and was questioned about the huge amount of cash - $757.2 million - the company has on hand.
A2 Milk – which counts China as its main market - generates a lot of cash and one market analyst said its bank balance could approach $900m this year if the company did nothing.
The company has never paid a dividend but has just finished a $149m share buyback.
Hearn said it was “entirely reasonable” for shareholders to want to better understand how a2 Milk planned to use its cash, and whether there would be a capital return.
But he said the company’s capital management continued to priortise investment in growth.
Hearn, who is being replaced by non-executive director Pip Greenwood, said it was a matter of placing balance sheet flexibility ahead of shareholder capital returns.
The company has already said that it plans to invest heavily in its Mataura Valley Milk (MVM) plant, in Southland.
“Our immediate priority for capital is to drive the transformation of our supply chain, by expanding our China label registered market access through additional registrations and better utilising our capacity at MVM through additional investment in our capability,” Hearn said.
When a2 Milk acquired MVM in 2021, it said at the time that it would also need to invest in blending and canning, and associated infrastructure, in order to gain the full benefits of that acquisition.
Since then, a2 Milk had developed plans for such an investment, he said.
“However, we have also considered other options such as a commercial arrangement or the acquisition of a blending and canning facility in New Zealand, China and/or other markets to accelerate our ability to potentially gain additional China label registrations,” Hearn told the meeting.
A2 Milk counts China as its main market but the giant economy is facing big challenges. Photo / Getty Images
In the meantime, a2 Milk had established additional relationships with partners in New Zealand to provide blending and canning services to accelerate its use of MVM.
“We believe it is prudent for the company to first solve this supply chain transformation to set us up for further growth in the future, and then to consider, with the remaining capital, the most appropriate mechanism to implement further capital returns to shareholders in the future,” he said.
He added that a2 Milk was “not quite ready” to outline its plan in further detail.
Forsyth Barr analyst Matt Montgomerie noted that a2 Milk had commented at length at the meeting about investment in its supply chain.
“For me, it’s very clear – and it’s also very clear for the market – that it’s not a matter of if, it’s a matter of when, that a2 Milk decides to deploy its significant cash balance,” he said.
“It’s clear that they are looking to expedite product innovation at their MVM site, which is quite important for their growth,” he said.
A2 Milk and its competitors face challenges in China - by far the world’s biggest market for infant formula.
The number of births in China tumbled 10 per cent last year to hit their lowest level on record - despite a slew of government efforts to support parents and amid increasing alarm that the country has become demographically imbalanced.
China had just 9.56 million births in 2022, according to a report published by the National Health Commission - the lowest figure since records began in 1949.
Montgomerie said infant formula players were adjusting to lower birth rates in the PRC.
“A2′s Milk’s competitors are pushing new product on to the market and, as the market declines, a2 needs to cater to a broader customer group, which will be achieved through innovation,” Montgomerie said.
“By owning stainless steel [production capacity] itself, a2 helps to de-risk the proposition,” he said.
In terms of a capital reward, any imminent return to shareholders looked unlikely.
“It can’t be forgotten altogether because a2 has a significant balance, and it’s highly unlikely that all will be utilised in terms of a2 making this investment,” Montgomerie said.
“It’s a very cash-generative business anyway, so the longer it is prolonged, the bigger the cash pile gets.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
