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NZ's A2 Milk revenue forecast misses expectations, shares drop 20 percent

Reuters logo Reuters 15/05/2018

New Zealand dairy company A2 Milk Ltd on Wednesday said it would boost revenue this year by more than 63 percent, but its shares sank to a three-month low as the gain failed to meet bullish investor expectations.

A2, which relies heavily on sales to China, said it expected revenue for the 2018 financial year of NZ$900 million ($617.4 million) to NZ$920 million, compared with NZ$549.5 million the previous year.

That fell short of a NZ$940 million average forecast from eight analysts polled by Thomson Reuters, suggesting a degree of unrealistic expectations around the company.

"Everyone's been too optimistic, the stock has been over-hyped and people expect upgrades constantly and clearly this is not an upgrade," said Mark Brown, chief investment officer at Devon Funds Management, which owns A2 shares.

The stock dropped 20 percent to a three-month low shortly after the market opened, before recovering slightly to NZ$10.50. Shares in Synlait Milk, which has a supply arrangement with A2, dropped 5 percent to NZ$10.90.

The drop in A2 shares weighed on New Zealand's benchmark S&P/NZX 50 index, which fell as much as 2.3 percent to an almost two-week trough.

A2's revenues more than tripled in the three years to June 2017 as its infant formula was embraced by Chinese parents, driving its shares up more than 600 percent since the start of 2016.

However, the company said on Wednesday that higher marketing costs and slower sales were starting to drag. It expects to spend about NZ$82 million to NZ$87 million on marketing for the full year, primarily in its China and U.S. businesses.

It added that the forecast revenue reflected the impact of seasonal sales in China, which are weighted towards the first half of the financial year.

"It's a disappointment with respect to their sales as well," Brown said, noting that export data tracked by Devon Funds suggested direct sales to China had slowed compared to the end of 2017.

(Reporting by Nicole Pinto in BENGALURU and Charlotte Greenfield in WELLINGTON; Editing by Jane Wardell and Stephen Coates)

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