Worst Week Since GFC | A2 Milk Update

29 February 2020

Global markets entered into a free-fall overnight, with the US market indices down over -4% with losses now greater than -10% from market peak. The correction in the US market over the last 6-trading sessions is actually the fastest -10% decline in the S&P 500 index from a record high, and even beats the Black Monday episode in October 1987 in that respect. With a day left to run, we are on track for the worst weekly decline since the Global Financial Crisis (GFC) in 2008.
Regardless of the Coronavirus health impact/mortality rate, it is creating real disruptions and uncertainty in the global economy given the response from officials and businesses. The outbreak has the potential to become a pandemic and is at a decisive stage, the head of the World Health Organization said Thursday. Goldman Sachs slashed its outlook for US companies’ profit growth to zero. Germany is examining potential stimulus measures to stem the economic impact, Saudi Arabia halted religious visits that draw millions, and Japan is reportedly closing its schools till March end. Microsoft joined an expanding list of companies warning over the impact of the virus on operations.
In times of extreme volatility there are clearly near-term risks. While we think it is too early to “buy the dip” in the current market, we believe it is important to focus on the medium-term outlook for companies as opportunities will arise once market volatility subsides.


Stock in Focus: A2 Milk (:NZX / A2M:ASX)

Despite the broader market selling off yesterday, A2 Milk shares rose after delivering another impressive profit result.
A2 reported a 21% per cent increase in first-half net profit following strong growth in the United States and Asia. Total revenue for the first six months of the year rose 31% and A2 said the scale of its infant nutrition business meant it was now looking at additional manufacturing. Further, trading in the first two months of the 2nd half of the 2020 financial year has been strong with positive initial demand pull for English label product through online sales and daigou trade on the back of coronavirus virus concerns (worries around food safety).
Management have maintained their profit margin guidance, although were unable to quantify the impact of COVID-19 as either positive or negative, with the key issue being potential disruptions at Chinese ports.
We currently have a BUY rating on A2 Milk.
Members should look out for a full update on A2 Milk to be released in our weekly report.


Australia & New Zealand Market Movers

The Australian market continued to trend lower yesterday (ASX 200 -0.8%), wiping out all of the benchmark's gains since the start of the year.
Of companies reporting earnings on Thursday, Rio Tinto shares fell after its biggest profit in eight years came with a warning that the coronavirus would cause "significant uncertainty'' for commodity markets in the near future.  Flight Centre fell after it downgraded its underlying profit forecast for the full year because of the coronavirus. It has now reduced its guidance range to between $240 million and $300 million. On the flipside, Costa Group rose after telling shareholders it had achieved its October guidance despite a challenging second half to 2019. Bank of Queensland also rose after it flagged improved momentum since its capital raising, coupled with better-than-expected income growth and improved impairment expense
The New Zealand market was lower on Thursday (NZX50 -0.8%) as kiwi energy stocks came under pressure and global markets continued to decline. Uncertainty around Rio Tinto’s Tiwai Point aluminium smelter is putting downside risk on energy retailers, making them first in line for investors looking to sell out of stocks. There were a number of stock specific announcements: New Zealand Refining Company fell 6% as it reported an 86% drop in net profit after the US-China trade war and new marine fuel standards slashed margins. Air New Zealand fell after noting weaker earnings in its half-year report, down 8.8% to $198 million from $217 million a year earlier, although this result was already flagged to the market. Vista Group International rose despite reporting a result weakened by covid-19. Finally, Metro Performance Glass shares were higher as it reaffirmed earnings guidance and expected net debt reduction of $15m (from $83.3m at FY19) – in line with expectations.


3 Things Markets Will be Watching this Week

  1. ​​​Coronavirus headlines are likely to sway investor sentiment.
  2. Local earnings season across Australia & NZ continues this week.
  3. Overseas earnings season winds down.

Have a Great Day,


The correction in the US market over the last 6-trading sessions is actually the fastest -10% decline in the S&P 500 index from a record high, and even beats the Black Monday episode in October 1987 in that respect. With a day left to run, we are on track

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