A2 Milk shares dive after daigou trade collapse hits profit

A2 Milk CEO David Bortolussi. Picture: Britta Campion / The Australian

• JARED LYNCH

  REPORTER

  
• 41 MINUTES AGO FEBRUARY 25, 2021
• 10 COMMENTS

COVID-19 has exposed A2 Milk’s ongoing reliability of the daigou trade - or students, tourists and now corporate groups buying products in Australia and sending them to China.

More than 35 per cent has been wiped off half year net profit, which fell to $NZ120m ($122.01m), after the daigou trade collapsed amid COVID-19 travel bans and supply chain disruption.

Meanwhile revenue plummeted 16 per cent to $NZ677.4m, with A2’s new chief executive David Bortolussi warning the group’s full year earnings before interest, tax, depreciation and amortisation margin could sink as low as 24 per cent.

READ NEXT

This margin erosion is below the level that former A2 chief Jayne Hrdlicka cited, when she warned in mid 2019 tha an increase in marketing would result in the margin falling to about 28 per cent.

After digesting A2’s half year earnings and outlook on Thursday morning, investors were spooked again, with A2 shares slumping 16.4 per cent to $9.30.

Mr Bortolussi said the group’s “main challenge” is the daigou channel - a channel A2 remained committed to despite its lack of transparency and the company’s control over distribution.

The rise of daigous in the past decade propelled A2 and other companies, including Blackmores and Bellamy’s, to riches because it was effectively free distribution into the world’s second biggest economy.

It suited A2’s capital-light business model well and catapulted the company to market darling status, with its share price rising from 56c in April 2015 to a high of $20.05 mid last year. Then COVID struck and with it the evaporation of the daigous and A2’s share price, which has now more than halved from its record high.

The problem with daigous is that it clouds distribution, with companies losing oversight of what products go where and when - a dilemma during a crisis such as a pandemic.

But despite the issues associated with daigous, A2 is not planning to wean itself off the channel in favour of mainstream cross border e-commerce distribution platforms.

New & improved business newsletter. Get the edge with AM and PM briefings, plus breaking news alerts in your inbox.

Sign up

Mr Bortolussi is expecting the daigou market will begin to recover in the next six months. For that reason, he said the company had to strike the right balance between supplying mainstream cross border ecommerce channels and the daigou resellers to support the bounce back.

“The cross border ecommerce channel for our English label business is an important channel for us. But we have got to make sure we get the right balance between the activity we have in that channel and how we reactivate the daigou channel as well.

“The transparency of the (daigou) channel is more challenging than other channels. But when we look over the past six months my view is COVID has caused a lot of demand and supply volatility in the market and during the year as demand spiked we had more sales and inventory earlier in the year going through the channel than we may have expected and it’s taking a little bit to unwind.

“From what I have learnt from the team, we are the majority of the way through that, so I am hopeful that will rebalance in the second half and we’ll see a recovery in the daigou channel. But it’s very hard to be specific around that because the level of transparency around the channel is more challenging than other more traditional channels.”

A silver lining for A2 is demand is still strong among Chinese Consumers. A2’s China-label infant nutrition revenue soared 45.2 per cent to $NZ213.1m, with its market share in China rising 0.7 per cent to 2.4 per cent

A2’s products are now stocked in 22,000 mother and baby stores.

Its US business is also doing well. Revenue across its American operations jumped 22.3 per cent to $NZ34.2m, while it reduced its loss to $NZ11.6m - $NZ18.4m improvement on the previous corresponding period.

The company’s most mature product, Australian fresh milk, continued to grow, with revenue increasing 16.3 per cent to $NZ86.9m.

But the collapse in the daigou market has overshadowed those gains. Mr Bortolussi is now expecting A2’s full year revenue to be at the lower end of its guidance at around $NZ1.4bn and a EBITDA margin of 24-26 per cent.

“The company remains confident in the underlying fundamentals of the business and will continue to invest behind the brand and in its capability to drive long term growth.

“However, the pace of recovery in the daigou/reseller channel and in the CBEC channel has been slower than previously anticipated and the Company now expects revenue to be at the lower end of the previous guidance range.

“A lower EBITDA margin range is now expected due to lower revenue, higher brand investment, longer daigou/reseller support, movements in foreign currency and adverse channel mix relative to what was anticipated in December.”

But Citi analyst Sam Teeger isn’t ruling out further downgrades.

“The weaker than expected outlook is likely to disappoint and the lack of capital management may increase investor doubts around whether A2 will have to downgrade its guidance again,” Mr Teeger said.

“It implies a significant 4Q21 improvement in the daigou channel, which may be challenging without the return of students and tourists, the ongoing resurgence in Chinese domestic brands, and an outdated formulation.”

A2 Milk will not pay an interim dividend.

UPDATED REPORT IN THE AUSTRLIAN