Tiwai & Trans-Tasman Bubble | A2 Milk Update

29 September 2020

Global markets were higher overnight as US markets (S&P 500 +1.6%) jumped after four weeks of declines and European shares added the most in three months in broad gains for equities. There were no obvious drivers for the positive move and month-end flows are being noted as a possible factor, as investors reweight into equity markets after a poor month.

Investors sought bargains among sectors hardest-hit by the coronavirus recession, now limping toward its ninth month. Energy, financials and industrials, which suffered the heaviest blow from the economic shutdown were the best performing sectors of the session, as investors look for opportunities.

Signs that US politicians are moving towards a new fiscal stimulus costing $2.4 trillion still remains on the table and has been adding support for stocks in recent days, while the Federal Reserve continues to provide liquidity. Economic data released over the weekend showed Chinese industrial profits grew for the fourth straight month, evidence of progress in the global recovery from the pandemic led recession.

A2 Milk Company (:NZX / A2M:ASX)

A2 Milk shares fell (-9.7%) yesterday, after warning its 2021 financial year first half revenue would take a major hit due to disruption to its daigou trade – with the Australian state of Victoria remaining in lockdown. The daigou business channel is being impacted by a lack of travel and tourism (retail), and higher freight costs (commercial). The hit is expected to be concentrated towards the first half, while 2021 full year revenue is expected to be between $1.8 billion to $1.9 billion, up "only" +7% from the previous year.

What is promising is A2 Milk's other sales channels are performing strongly. However, A2 Milk, was not as fully immune to covid-19 as previously expected and management are subject to factors outside of their control. 

We continue to remain BUY rated on A2 Milk over the medium-term as a quality name. however the share price could remain prone to volatility if lockdown and travel restrictions persist longer than anticipated – making A2 now more of a re-opening play.


Australia & New Zealand Market Movers

The Australian market edged lower on Monday (ASX 200 Index -0.2%), with losses in the big banks and miners offsetting a rising in local tech stocks.
The major miners dragged the market, with iron ore demand sentiment remaining nervous ahead of National Day holidays, with port stocks in China at their highest level since late March.

Beaten down travel related companies also did well  on reports that a travel bubble between New Zealand and parts of Australia could be possible by the end of this year, if covid-19 infections continue to decline and with restrictions in Victoria starting to ease. This saw the likes of Qantas (+6.4%), Flight Centre (+5.8%), Webjet (+6.6%) , and Sydney Airport (+1%) in high demand. 

The New Zealand market was basically flat yesterday (NZX 50 Index +0.04%) as losses by market heavyweight A2 Milk were offset by a rise in the major power companies (gentailers).

Prime Minister Jacinda Ardern said she would offer Rio Tinto a discounted transmission price to keep the Tiwai Point aluminium smelter open for another three-to-five years, allowing power generators time to adjust power supplies, with the condition of the cheap power to be to protect jobs at the smelter. 

Meridian Energy — which owns the Manapouri power station supplying the smelter — jumped +6.6%, while Mercury NZ led the market jumping +7.4%, followed by Contact up +6%, and Genesis Energy, which was less affected and up +2.8%. 

3 Things Markets Will be Watching this Week

  1. ​​​​​​​​​​​​​​​COVID-19 related -flow remains key, with second wave and lockdown headlines, while US Congress debate what an extension of stimulus will look like.
  2. This week sees the first 2020 US presidential debate, monthly US employment data, and US 2nd quarter economic growth (GDP) data.
  3. Locally, NZ business and consumer confidence data and the latest building permits data will be released along with retail sales in Australia
Global markets were higher overnight as US markets (S&P 500 +1.6%) jumped after four weeks of declines and European shares added the most in three months in broad gains for equities.

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