US markets (S&P 500 Index -0.7%) started the week with a negative tone, as investors brace for a more hawkish Fed policy following Friday’s comments.
Treasury yields continue to climb with the 2-year rate accelerating to 3.48%, reaching its highest level since 2007, well ahead of the 10-year US interest rate which rose to 3.11%.
Most sectors traded lower, with tech and real estate stocks leading losses, while energy and utilities were the only two sectors in the green.
European markets (Stoxx 600 Index, -0.8%) closed lower, as the relatively more dovish European Central Bank (ECB) also reaffirmed that the bank would also act more aggressively to tackle inflation.
A2 Milk (ATM:NZX)
A2 Milk shares bucked the sell-off, jumping +9.7% yesterday after delivering a stronger than expected result for the 2022 financial year given challenging market conditions.
Group revenue rose +20% from last year while operating earnings (EBITDA) lifted +47% from last year to $196.2m. Better inventory management saw gross margins normalise (following the previous year’s write-off), while profit growth was limited to increased marketing spending, which appears to continue to rise to achieve modest revenue growth. The surprise was how well China infant formula performed despite macro headwinds as birth-rate in China slumping -11.5% in 2021 and is expected to fall further in 2022 – the decline was partially offset by an increase in household penetration and consumption within the infant formula market.
Strong cashflow generation and profitability in the past means A2 Milk is currently sitting on $816.5m cash on hand, with management announcing an on-market share buyback of $150m – was well received by the market.
While a welcome improvement, the single-digit revenue growth is enough to excite us to change our recommendation. We believe there is still a lot of work and challenges ahead to justify A2’s current share price in our opinion, and for that reason we are still Hold rated.
Australia & New Zealand Market Movers
The Australian market (ASX 200 Index, -2.0%) was down on Monday suffering its largest single-day loss in the last two-months, largely linked to Wall Street’s decline. strong Australian retail sales data ALSO suggests RBA could be just as aggressive as the Fed.
All sectors traded lower, with tech stocks and materials suffering the largest losses.
Next DC was one of the hardest hit, falling -6.4% as despite delivering a sound full-year result, its guidance may have come in softer than expected – but the majority of the share price decline was likely linked to market-wide tech sell off as opposed to the actual result.
Fortescue Metals fell -4.9%, as its revenue and profits slumped from the previous year due to softer iron ore prices well-known to the market, but the result overall came in better than market had expected, yet not enough to avoid being sold off.
The New Zealand market (NZX 50 Index, -0.9%) was down following global sell-off.
Restaurant Brands fell -4.8%, as inflationary pressure caused half-year profits to half from last year down to $43.5m, with the weak result flagged earlier this month.
Things Markets will be Watching this Week
Monday
Australia: Earnings from Next DC, Fortescue and Minerals Resources
New Zealand: Earnings from A2 Milk and Restaurant Brands
Tuesday
Australia: Earnings from Woodside Energy, Harvey Norman
Wednesday
Global: Eurozone CPI (inflation data), and China Manufacturing data (PMI)
Australia: Earnings from DGL Group and Atlas
New Zealand: Earnings from Harmony
Thursday
Global: US initial jobs claim data.
Friday
Global: US non-farm Payroll data
