A2 Milk shareholders expecting news that might bolster the company’s flagging share price left empty-handed after today’s annual meeting.
Management painted a picture of a more modest growth path than the explosive rates of the past, leaving little to spark a rally.
The alternative milk and infant formula company’s share price peaked at $21.51 in July last year before a series of mostly Covid-19 driven earnings downgrades saw it slump back into single figures. The stock closed today at $6.27, down 4c.
Chairman David Hearn fielded a number of questions at the meeting about the company’s performance and the weak share price, but little was revealed to change the market’s view.
In an investor day update in October, a2 Milk said there had been no material change to the 2022 position as outlined in its most recent results announcement, except that it was seeing a different mix in its business – favouring English-label infant milk formula.
The only additional information at today’s annual meeting was is in relation to its trading over the 11/11, aka Singles Day, online sales period in China, which finished at the end of last week.
Chief executive David Bortolussi said English-label infant formula sales during the 11/11 online sales period were down on last year, but with improved market pricing across cross-border e-commerce (CBEC) platforms and reseller channels, he said.
“Conversely, our China-label sales were up significantly on a smaller base,” he said.
A2 Milk’s net profit plunged 79.1 per cent to $80.7 million in the June year due to the prolonged impact of the pandemic and a rapidly changing China infant nutrition market, prompting the company to review its growth strategy.
Bortolussi, who has been in the job since February, has been charged with carving out a new future for a2 Milk – one that will involve product innovation and slimmer margins.
A2 is now targeting sales revenue of $2 billion over the next five years or more, compared with $1.2b over the past financial year.
The company said its sales margins would probably be in the “teens” in the medium term – well down from the 20s and 30s over the last few years.
In his presentation, Hearn said “there is no hiding from the fact that the 2021 fiscal year was very challenging for the company”.
“But if it was a challenging year for the company and its management, I recognise that it was a very disappointing year for you, our shareholders, in many ways,” he said.
“While we were disappointed with our financial performance and the pressure this put on our share price, we were pleased to deliver many significant achievements against our strategic objectives, despite the challenging market conditions,” he said.
A2’s English-label infant formula typically ends up in China via the daigou or cross-border e-commerce channels, whereas the China-label product appears there through the more conventional sales channels.
During question time, Hearn said a return to the extremely high growth rates of recent years was unlikely.
“I genuinely believe that the company has a bright future, which may sound strange given some of the darkness that we have had to travel through this year,” he said.
“I don’t think we will see – if I am honest – the spectacular levels of growth that we have seen in the previous four or five years,” he said.
“Those were truly exceptional times. But we are going to see good levels of growth, I believe,” he said.
Bortolussi spoke about the challenges infant formula companies face from China’s declining birth rate.
Commenting on the daigou trade – which started as “out-of-suitcase” buying by individuals for transport to China – had now become more sophisticated to a point where it was more akin to an e-commerce business.
Daigou has played a huge part in the company’s success in China – the world’s biggest infant formula market.
“We expect that the channel will regain some of its size and prominence in the market over time,” he said.
“Overall, what that means is that over the next five or more years we are expecting the English-label channel to recover to about half of pre-pandemic levels,” he said.
Harbour Asset Management senior research analyst Oyvinn Rimer said there wasn’t much in the meeting to set the share price alight.
“The only incremental information is the reference to the 11/11 (Singles’ Day) sales where they said English-label products saw negative growth, which is different to some of the analyst reporting in the last few days that these sales were significantly up,” he said.
Harbour has a stake in a2 Milk.
In board movements, China-based director Bessie Lee, who came on board in February this year after the retirement of former China-based director Jessie Wu, said she would leave the board once a suitable replacement had been found.
Bortolussi was voted on to the board with 98.9 per cent support.
Warwick Every-Burns, who retired by rotation, was re-elected with 74.8 per cent of votes in favour and 24.7 per cent against.
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