Tech Stocks Tumble | A2 Milk Update

1 March 2021

Global markets tumbled overnight (S&P 500 index -2.5%) as 10-year government bond yields rose across the globe as investors continued to anticipate rising consumer prices. The Nasdaq US technology index closed -3.5% lower as investors take profit and rotate away from pandemic-era winners toward companies poised to benefit from an end to lockdowns.

As the selloff in global bonds deepens, the benchmark Treasury yield has hit a one-year high, touching 1.5%, the same level as the 1.5% dividend yield of the S&P 500. A similar trend is being experienced in New Zealand, with the NZ 10-year government bond yield hitting 2.0% this morning.


A2 Milk (:NZX / A2M:ASX)
A2 Milk plunged another -15% yesterday after lowering its full-year earnings guidance for the third time.

As expected, it was a challenging 1st half for with revenue down -16% to $677m and operating earnings -32% to $179m at a margin of 26%. However, once again the market has been disappointed by the 2021 outlook with earnings margins now set to be weaker at 24-26%, down from 26-29% reflecting a range of pressures. The revenue outlook remains constant at $1.4bn.

On the plus side, management noted they believe Corporate Daigou activity has bottomed and is now trending up and they are working on a number of initiatives. However, there is no definitive evidence that these actions are working/will work and we remain cautious. In saying that, we remain confident on longer term brand & growth potential but uncertainty remains regarding a 4th quarter recovery in Daigou & as we have seen this is not risk-free.

As we touched on in our last update, there is a lot of unknowns, with recent announcements a stark reminder visibility is low and the high margin of error in earnings forecasts. does appear to be prioritising longer-term brand positioning and brand health, rather than short-term profit. The path forward is unlikely to be smooth. However, A2 does have a large cash balance and taking a longer term view given the harsh share price fall since August we see valuation support and remain BUY rated with a medium term horizon.


Australia & New Zealand Market Movers

The Australian market was higher on Thursday (ASX 200 index +0.8%) helped by the commodity-based sectors of materials and energy as BHP Group hit a record high.

In stock news, Nufarm said revenue has climbed 17% in the first four months of the new financial year, with growth in all crop protection regions and seed technologies.

An impressive result from Ramsay Healthcare (+7.7%) which highlighted a convincing improvement in volumes as RHC benefits from the backlog of procedures from the private and public sectors across surgical and non-surgical activity.

The New Zealand market sold-off yesterday (NZX 50 index -1.2%) as the index hit a 4-month low. Former-market darling A2 Milk was responsible for the bulk of the index’s decline, with investors trading more than $56m worth of stock.

Listed exporters have been under pressure with the rampant kiwi dollar, Fisher & Paykel Healthcare fell another -2.5% as investors worry the exchange rate will eat into future profits.

Genesis Energy climbed 1.8% after it raised its full-year earnings guidance due to low national hydro storage and expected demand for generation from its gas and coal-fired plants at Huntly.

Pizza Hut and KFC operator Restaurant Brands were down -0.3% as net profit dropped 3.2% on a like-for-like basis. The fast-food operator said it lost sales during the lockdowns in New Zealand, but its stores in California and Hawaii were faring well.

Warehouse Group jumped 5% after it upgraded expected earnings in the half-year ended January. The retailer now says adjusted net profit will exceed $110m, rather than the $90m forecast last month.

In other news, Finance Minister Grant Robertson has amended the RBNZ's main objectives targeting inflation and employment – adding house prices to the mix. A new clause will require the central bank's committee to 'assess the effect of its monetary policy decisions on the Government's policy' – to explicitly support more sustainable house prices by dampening investor demand and improving affordability for first home buyers.


3 Things Markets will be Watching this Week

  1. Once again, corporate earnings dominate the week ahead on both side of the Tasman.
    Key results include Bluescope Steel, Chorus, Freightways, Mercury NZ, Summerset, Woolworths, Vocus, Sydney Airports, Scentre Group, Meridian Energy, Spark NZ, Flight Centre, Qantas, Zip Co, Stockland, Afterpay, Ramsay Health Care, Air NZ, a2 Milk, Precinct Properties, and Genesis Energy.
  2. The RBNZ’s official cash rate call on Wednesday will be a focus.
  3. From a macroeconomic point of view, investors will be keeping a nervous eye on bond markets as the growing chances of normalization on a global acceleration of vaccinations and rising commodity prices leads to a rise in bond yields amidst inflationary concerns. Vaccine & COVID news flow also continues to dominate headlines.


A2 Milk plunged another -15% yesterday after lowering its full-year earnings guidance for the third time.

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