Sanctions & Escalation | A2 Milk Result

23 February 2022

Global markets were mostly lower overnight (although US markets were closed for holiday) as geopolitics remain the focus. 

Early in  the session French President Macron said that he had secured an “in-principle” agreement for a summit between Presidents Putin and Biden, which was confirmed by Washington. Hopes then faded after hours later the Kremlin said that there were no concrete plans. This morning the Russia situation has escalated as Putin recognised Ukraine rebel region – Russian President Vladimir Putin has recognised two breakaway regions in eastern Ukraine as independent entities , drawing U.S. and European vows of new sanctions and upping the ante in a crisis the West fears could unleash a major war.

European markets were lower (Stoxx 600 index -1.3%), its lowest level since October, as geopolitical risks outweighed stronger European PMI services indices that were much stronger than expected across the board. This reflected a strong bounce-back in activity following the worst of the Omicron outbreak as restrictions eased, with increased demand for travel, tourism and recreation services.

Global markets are already pricing chunky geopolitical risks, but there is scope for further downside across all sectors, if a serious conflict breaks out between Russia and Ukraine.

A2 Milk (:NZX / A2M:ASX)

A2 Milk shares jumped 12.3% yesterday after its 2022 half year result came in better than expected, with the expectations bar set very low. 

Underlying operating earnings (EBITDA) coming in at $97.6m, half its previous year result as revenue slipped -2% from the previous year, as inventory issues and heightened brand investment activity weighed down on earnings. What encouraged investors is that revenue outlook had improved, particularly infant formula which is expected to be stronger in the second half, and full year revenue to be up from 2021.

While an encouraging result, we are still HOLD rated on A2 Milk given the large amount of work required to regain investor confidence and that weaker margins make profit growth less attractive than it had in the past.



Australia & New Zealand Market Movers

The Australian market was up yesterday (ASX 200 index +0.2%), with most sectors closing out a volatile session in the green following (at the time) news of Putin and Biden agreeing to hold a summit which was seen to possibly deescalate the Russia-Ukraine situation.

Tech shares continue to lead losses, Zip falling -7.8% to fresh 18-month low after warning tis cash earnings, bad debts and operating costs were worse than the market was expecting for the first half.

AGL Energy jumped +10.6%, after its board rejected a $8 billion takeover offer from Canada’s Brookfield Asset Management. 

OOH! Media rose +5.2% after delivering an upbeat result and trading update, as well as paying out a 1 cent per share dividend to suggest confidence of their outlook and current balance sheet position. Telstra rose +1.5% after agreeing to give TPG Telecom (+3.1%) access to its mobile network in a regional zone in return for access to TPG’s 4G and 5G spectrum in those areas.

The New Zealand market was up on Monday (NZX 50 index +0.1%) eked out a gain as a few better than expected result offset a generally downbeat day for most of the market.

Chorus rose +8.7% after delivering a strong result, as well as a $150m share buyback and upbeat dividend guidance.
Freightways rose +0.4%, after its result was better than expected despite lockdown, as activity rebounded strongly after restrictions had been lifted.

Metro Performance Glass shares slumped -11.3% after delivering a lockdown induced weak result, but also lowered its earnings guidance for the 2022 financial year to $6m to $7m, less than half the 2021 result.  

3 Things Markets will be Watching this Week

  1. Geopolitical Risks – Russia/Ukraine
  2. US housing data, and CPI (inflation) data from Eurozone. The RBNZ makes an interest rate decision. 
  3. Local earnings with its busiest week, A2 Milk, Costa, Heartland Bank, Woolworths, Rio Tinto, Wisetech, Air NZ, Scales Corp, Summerset, Qantas, Delegat, Harvey Norman and Tourism Holdings reporting.
Global markets were mostly lower overnight (although US markets were closed for holiday) as geopolitics remain the focus.

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