A day after seeing its shares rise nicely on the peace pact with Synlait (ASX:SM1), its once key supplier, a2 Milk (ASX:A2M) saw its shares sold off heavily on Monday after reality hit in the form of a moderately OK 2023-24 results but weak outlook.
The company saw its share fall more than 18% yesterday despite the modest 8% improvement in profit to $NZ168 million.
Earnings and margins lifted in line with the market’s forecast, with a solid rise in sales into the key Chinese market, but investors were more worried about the company’s unconvincing outlook.
The revenue growth of 5.2% to $NZ1.675 billion was driven by increased sales in China (+14.1%) and the US (+8.2%), but sales in the key home markets of Australia and NZ slumped 14.6% in total, which was a negative.
The company said infant formula sales grew 4.6% over the year to June 30, despite a 10.7% fall in the overall Chinese market, which is facing a growing population decline and falling birth rates.
The company’s top money-making segment, China and other Asia, saw revenue of $NZ1.14 billion, up 14.1%, while China label IMF sales jumped 9.5% to $NZ612.3 million.
Analysts said the outcome in China as solid, but said the guidance was below what the market expected.
But the company took a conservative route in the outlook in forecasting single digit growth in EBITDA for 2024-25 (2023-24 EBITDA was up 6.9%) when the market was looking at 15% growth – so the shares fell off the back of the truck.
“China IMF market conditions remain challenging and the Company expects a further market value decline in FY25,” the company explained in its outlook.
“At this stage, the Company is expecting mid single-digit revenue growth in FY25 versus FY24, with growth affected by IMF supply constraints which are expected to be resolved in 1H25.
FY25 gross margin (% of sales) is expected to be broadly similar to FY24 (45.8%), with 1H25 down (impacted by airfreight) and 2H25 up compared to prior year.
‘An increase in brand investment is planned for FY25 with a similar reinvestment rate (% of sales), and Administrative & Other expenses are expected to be similar to down compared to FY24 (% of sales).
“The Company expects EBITDA margin (% of revenue) to be broadly similar to FY24 (14%), with 1H25 down and 2H25 up compared with prior year.
And “operational cash conversion is expected to be less than 100% impacted by the settlement of Synlait FY24 payments withheld in accordance with contractual arrangements and a reduction in purchase order deposit payment terms going forward.”
So there are a few shoals hidden in that guarded outlook which helps explain the sharp fall in the value of the shares on Monday.