Will a2 Milk’s result revive its flagging share price?

A2 Milk is set to report another earnings lift on Monday. Photo / Richard Leonard

A2 Milk looks set to book improved earnings for what would have been a difficult year when it reports on Monday.

Forsyth Barr expects the dairy and infant formula marketer to report a net profit of around $153.3 million, up from $122.5m last year.

The broker also sees better earnings further out - $168m for 2024 and $196.8m for 2025.

The former high flyer’s earnings have been well short of the record June 2020 profit of $385.8m.

In April, a2 Milk said it had maintained its 2023 revenue guidance of low-double-digit percentage growth on 2022, but noted that English-label infant formula revenue was now expected to be down to mid-single digits, partially offset by continued strong double-digit growth in China-label infant formula revenue.

As a result, the company expected revenue growth to be at the low end of its previous expectations (about 10 per cent).

A2 Milk said at the time it expected an ebitda margin similar to 2022′s, which was 13.6 per cent.

The company’s shares, which last traded at $5.36, have fallen by about 30 per cent since the start of the year, reflecting the market’s caution about the outlook.

“It’s very interesting at the moment and it’s shaping up to be a pretty similar situation to this time last year, when the stock’s valuation had become compressed but without any earnings downgrades,” Forsyth Barr analyst Matt Montgomerie said.

“The market is quite cautious going into Monday on the outlook, so that will be a focus point.

“We think that the numbers will be reasonably healthy and constructive, showing solid revenue growth, and potentially some margin expansion.”

The problem facing a2 Milk and other infant formula companies is China’s declining birth rate and increasingly intense competition in the PRC, particularly from local players.

“Nevertheless, it will reflect that they have had a pretty good year, all things considered,” Montgomerie said.

Increasingly, the game for a2 Milk will be about its China-label business - product that is specifically formulated for the Chinese market.

Of lesser importance will be the English-label trade - product that has arrived in China via the unofficial “daigou” trade, or through the cross-border e-commerce platforms.

China aside, investors will be keen to learn how the company is faring in the United States operation, where it has struggled to turn a profit.

A2 Milk derives the bulk of its revenue from China - the world’s biggest market for infant formula.

“A2 Milk’s growth has been strong and is one of few foreign brands (in China) taking share across both online and offline channels,” Montgomerie said in a research note.

“Further, our analysis shows brand health indicators across key social platforms remain strong, which bodes well as the market consolidates,” he said.

At last count, a2 Milk had $777m in the bank, which would provide interest income support.

Craig’s Investment Partners said the upcoming result from a2 Milk’s American operation could leave a sour taste.

Looking ahead, analysts Stephen Ridgewell and Ryan Li estimated a2 Milk would deliver a 2024 net profit of $165m - s6per cent below consensus - with the expectation that the first half of 2024 “could be particularly weak”.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.