ASX 200 flat, A2 Milk (ASX:A2M) share price sours

The ASX 200 (ASX: XJO) is currently flat. However, a couple of New Zealand businesses are the focus today.

A2 Milk Company Ltd (ASX: A2M)

A2 Milk said there is significant uncertainty and volatility in market conditions so far in FY21 because of COVID-19.

As a result, in the first half of FY21 the company is now expecting revenue of $725 million to $775 million (all figures are in NZ dollars). In the first half of FY20, the company generated revenue of $806.7 million – this means A2 Milk is expecting revenue to fall by 4% to 10.1%.

A2 Milk also said that group revenue for FY21 is expected to be in the range of $1.8 billion to $1.9 billion. In FY20 A2 Milk made $1.73 billion – which means over the whole year management are expecting revenue growth of 4% to 9.8%. A2 Milk is expecting a strong second half.

The FY21 group EBITDA margin is expected to be 31% (click here to learn what EBITDA is). That’s a small reduction from the EBITDA margin of 31.7% in FY20.

A2 Milk said there is a combination factors which is likely to affect the FY21 first half result. There is the flow on effect on pantry destocking after the strong sales in the third quarter of FY20 and there is lower than anticipated sales to retail daigous in Australia due to reduced tourism from China and international student numbers.

The company said that in September it has seen additional disruption to the corporate daigou and reseller channel, particularly due to the stage 4 lockdown in Victoria. The contraction in the daigou channel is more than expected and without the replenishment orders that would typically be anticipated at this point, according to A2 Milk.

This is important because daigou channel sales represent a significant portion of infant formula sales of the Australia and New Zealand business.

But because the company is still growing strongly with its Chinese infant formula business, A2 Milk only thinks this is a “single channel logistics issue.” Management believe this is only a short term issue and things will improve after COVID-19 is stabilised in Australia.

Pleasingly, A2 Milk said all other areas of the business are strong, including the liquid milk segment in Australia and the US and the local China business. The marketing it has spent money on is having a positive impact.

The A2 Milk share price is down around 10%.

Synlait Milk Ltd (ASX: SM1)

Synlait reported its FY20 result today. It said that its total revenue increased by 27% to $1.3 billion. Consumer-packed infant formula sales rose 15% to 49,180MT and lactoferrin sales increased by 46% to 30MT.

However, EBITDA (click here to learn what EBITDA means) only rose by 13% to $171.4 million. Net profit after tax (NPAT) actually fell 9% to $75.2 million.

The company said that profit reduced because of investments in new facilities and acquisitions over the past two years to create new opportunities for growth.

In FY20 the company saw $573 million of growth projects completed including Synlait Pokeno, the advanced dairy liquid packaging facility, and the acquisitions of Dairyworks and Talbot Forest Cheese.

The benefits of the facilities mean: significant conversion cost improvements, a 20% reduction in changeover powder despite processing more complex powders, dryer processing milk more than 14% faster (while lifting quality and yield), a third blending and canning line avoided due to the efficiency savings and an 18% reduction in downtime across all facilities.

Synlait is expecting similar demand overall in FY21 compared to FY20, however it’s expecting lower demand in the first half of FY21 because of higher levels of stock in the supply chain – this is exactly what A2 Milk said in its update today.

However, the company is still expecting strong underlying EBITDA and operating cashflows to continue with growth delivered by a full year of Dairyworks earnings and the integration of Talbot Forest Cheese.

Synlait is currently in the process of finalising a long term supply agreement with a new, multinational customer for packaged products which is expected to have a positive impact on earnings from FY23.

Overall, in FY21 the dairy company is targeting a similar profit, or slight improvement, compared to FY20.

Corporate Travel Management Ltd (ASX: CTD)

Corporate Travel shares are currently in a trading halt.

The travel industry has been heavily impacted by COVID-19, restrictions and impacts. However, Corporate Travel sees this as an opportunity.

In the trading halt announcement it said that it’s “considering, planning for, and expecting to announce, a capital raising comprising an underwritten pro rata accelerated entitlement offer” of shares to fund an acquisition which will be announced at the same time as the offer is announced.

Corporate Travel will be in a trading halt until it releases an announcement about the outcome of the institutional component on the offer, or the commencement of trading on 1 October 2020, whichever is first.

According to the AFR, the capital raising is expected to be worth about $400 million with Morgan Stanley and Morgans overseeing the raising. The acquisition is reported to be “company changing”.

Other news

The team over at Rask Media have covered the rest of today’s news, so make sure you head over there for more ASX share market coverage.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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