A2 Milk's shareholders will be keen to know how the company fared at this week's "Singles Day" shopping festival in China. Photo / 123rf
What’s eating a2 Milk?
The infant formula marketer’s share price has fallen sharply over the past month or so.
Today, the former high flier trades at around $5.30, down from almost $8.00 on July 30.
In an apparent role reversal, Fonterra, whose share price has struggled in recent years, looks to be on a roll as investors eye up the likely capital repayment from the sale of its consumer business - which includes well-known brands such as Anchor - as well Fonterra Oceania and Fonterra Sri Lanka.
Harbour Asset Management senior research analyst and veteran a2-watcher Oyvinn Rimer says several issues look to be driving a2’s share price before next Friday’s annual meeting in Auckland.
He said the data tracked by analysts seemed be reasonably soft “hence some concerns that the impending AGM might be another tough one”.
Rimer said a few analysts had come back from China - a2 Milk’s biggest market - and their sales channel checks suggested a slight worsening in the company’s performance.
“There was hope that China would commence a strategy and programme to improve the birth rate through economic policy support,” he said.
“This has not eventuated - not yet at least - and could coupled with the very weak marriage registration data, which is highly correlated to the birth rate - the market might be more concerned about the overall infant formula market,” he said.
Reuters reported that China, which has been releasing a slew of measures to bolster its sagging population levels, recorded a drop in marriage registrations for the first nine months of 2024.
For the first three-quarters of the year, 4.747 million couples were registered nationwide, the data showed. That is a year-on-year decrease of 943,000, Reuters calculated.
At its annual result on August 20, a2 management’s top line guidance was for mid-single digit growth compared with market consensus of high single-digit growth.
The variance was mostly attributable to first half 2025 supply issues linked to its key supplier Synlait, which has just gone through a major recapitalisation.
Rimer said those supply issues could disrupt trade this side of Christmas.
“With the week’s critical sales event - Singles Day - and an early Chinese New Year celebration next year, I am guessing the sharemarket is reflecting some risk off heading into this important trading period,” he said.
He added the anti-China “Trump effect” might also be hitting China-exposed companies.
Forsyth Barr analyst Matt Montgomerie said the marriage data, from a birth rate perspective, was “clearly a negative”.
“If we think about where the share price has come from - the stock ran up on China stimulus prospects and what that could mean six weeks or so ago.
“I think investors’ earnings expectations have not quite been met in terms of what that stimulus package could mean.
“Then the a2 brand-specific data has reduced a little bit, so those are the three key drivers.”
“Clearly, the company is working through a little bit of lull in the China Label infant formula business at the moment.”
A2’s share prices has gained about 30% over the past 12 months while Fonterra’s units have shot up by 67% over the same time.
Noting Fonterra’s return to investor favour, Montgomerie said it was fair to say there had been a role reversal between a2 and the co-op, albeit for different reasons.
“Fonterra’s share price performance shows the company has done a very solid job in terms of executing on what they have stated.
“It’s ticking all the boxes at the moment.”
A market starved of initial public offers (IPOs) would welcome a public issue and market listing for Fonterra’s consumer business, but analysts and fund managers said a trade or private equity sale looked more likely.
“We think there would be a lot of interest in an IPO of Fonterra’s consumer products business, including some well-known brands that New Zealanders have an affection for,” Matt Peek, Fisher Funds portfolio manager NZ Equities said.
“There has been a real lack of new companies listing on the NZX in recent years, so another option for investors would be a step in the right direction,” he said.
Salt Funds managing director Matt Goodson said a trade sale was more likely given the available synergies to potential buyers.
“We have been somewhat starved of quality IPOs and would absolutely look at it if they did decide to take that route,” Goodson said.
Montgomerie said Fonterra’s consumer assets may not all be sold in one transaction.
“Some parts of the ‘in-scope’ business could go to industry buyers and other parts to private equity buyers.
“In terms of industry buyers, we would expect that most of the large dairy groups would be interested – Nestle, Arla, Lactalis, Saputo, Friesland Campina, Danone. Supply agreements and what happens there will also be key considerations for buyers,” he said.
Private equity firms such as Pacific Equity Partners, Permina and Kohlberg Kravis Roberts are understood to have kicked the tyres at Fonterra.
It’s been a long time since the NZX has seen an initial public offer and sharemarket float of any size.
There was the disappointing debut of My Food Bag in March 2021.
Then came chemicals specialist DGL, which listed in May that year only to decamp to the ASX in July 2022 after a public fracas surrounding comments made by founder and chief executive Simon Henry.
The highlight of 2021 was Vulcan Steel’s debut in November of that year.
Since 2021 it’s been slim pickings.
NZME’s latest earnings downgrade could make it difficult for the company to meet its dividend forecasts, brokers Forsyth Barr say.
Forsyth Barr noted NZME - publisher of the New Zealand Herald, has downgraded its 2024 earnings before interest, tax, depreciation and amortisation guidance by 8% at the midpoint, reflecting weaker-than-expected advertising revenue and cost pressures.
After a solid start, advertising revenue growth slowed over the first nine months of 2024 as signs of improving sentiment faltered.
September 2024 was a particularly challenging month, resulting in advertising revenue falling 1% in the third quarter versus the prior comparable period.
“NZME is leveraged to a potential recovery in the economy and the property market,” the broker said.
“There are emerging signs that advertising has reached this inflection point, with fourth quarter 2024 revenues expected to be up 5%.
“However, cost-out efforts have been slower to materialise.
“We make cuts to our earnings estimates, primarily on higher costs.
“We also see this update making it harder for NZME to maintain the 9cps of dividends it declared in 2023/2022, and see a lowered chance of a capital return.
“We now forecast 8cps fully imputed DPS over the next few years, down from our prior expectations of 9cps.”
Data out from Stats NZ this week showing production has at least stabilised is welcome news for a depressed construction sector.
Concrete production fell more than 5% in the September quarter compared to last year, but was at least up on the June quarter. In seasonally adjusted terms, the volume of ready-mixed concrete rose 0.4% in the September 2024 quarter.
Concrete is typically poured at the start of a build and can be an early indicator of demand for later-stage products, such as plasterboard and insulation, Forsyth Barr said in a report.
“Including cement and aggregates, ready-made concrete production is a significant exposure for Fletcher Building (Concrete division about 20% of Ebit) and volumes have previously been a useful guide to its NZ revenue growth,” Forsyth Barr said.
“While stabilisation in concrete volumes is a positive, recent commentary from listed building materials names has been more subdued.”
Steel and Tube is likely to provide a trading update at its annual meeting on November 28.
Forsyth Barr expects the company’s outlook commentary to remain “sombre”.
The Guardians of New Zealand Superannuation, fund manager of the New Zealand Superannuation Fund, said it terminated Devon Funds Management’s New Zealand active equities mandate after more than a decade.
The Guardians appointed Devon in 2011.
As at June 30, Devon was managing assets valued at $202 million, or 0.3% of the Super Fund’s total asset value, the fund said.
Asked for a response, Devon Funds principal Paul Glass said Devon had a policy of never commenting on clients’ affairs.
However, he said Devon is part of ISG (Investment Services Group), which continues to manage over $7b for New Zealanders.
In July, BusinessDesk reported that ISG - the parent company for Devon Funds Management, JMI Wealth, Select Wealth Management, Clarity Funds and Tahito - had hired adviser Murray & Co to run a strategic review.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
"If you’re loyal to them, they will be loyal to you."