Just some thoughts on the report and some other stuff....

Just some thoughts on the report and some other stuff. Personally, I think a2 did quite well last year. But it seems currently there are quite a few hurdles that prevent them to give a positive guidance for the next year, despite we see some positive developments which counterbalance each other. And the biggest unknown in all of that is capital management. Also I think the big drop in share price on Monday and so far gradual recovery is the result of disappointed traders, who were expecting (like many of us) another share buyback to make a quick buck, were unloading their positions which also was magnified by not so flashy outlook.

So what we have

1. Transition to new china label might see some price discounts and write-offs as many competitors will try to unload old stocks. DB said so far they manage it well but you never know.
2. Raw material prices are coming down but effect from it will only be seen in the second half at best.
3. Seems MVM start getting involved but yet to make any meaningful contribution.
4. There are some others but the biggest unknown in all of it as I mentioned is capital management and this is what frustrates most. After reading presentation and listening investor call few times where DB pointed out several times that in capital management their priority is supply chain, I came to conclusion that lack of capital return this year is a result of Synlait’s current dire financial state. It’s not a secret a2 needs Synlait for china label without it a2 is doomed. I don’t think a2 wants to take over Synlait. I’d say it would be their least favorite option but they might have no choice. I won’t get into details but by my estimations in that case a2 would have to cough up at least 2/3 or over $500mln of their current cash reserves. Other options could be split/buy Synlait’s assets where a2 can takeover Dunsandel plant, privatise in partnership with Bright Dairy, some other combinations. The best outcome from this tragedy of cause would be that Synlait be able to get back to control their finances by itself by reducing debts, selling assets, etc, etc. I’m not an expert in Synlait, so, this is up to them but it looks like they need to sort it out within next couple of months. If they can’t we might see some events that would require a2 to take actions to protect their china label supply and it might involve some serious money. This is why they are keeping money for now. Anyway, once this saga with Synlait is over I expect a2 will do some return of capital to shareholders.

Well, any who, this is just my 2c