The A2 Milk Company Ltd (ASX: A2M) share price will be on watch after a profit downgrade from Synlait Milk Ltd (ASX: SM1).
Synlait’s profit downgrade
The food manufacturer said that it’s continuing to experience significant uncertainty and volatility.
Due to that market disruption, the company has decided to withdraw its full year FY21 guidance.
Synlait reminded investors that the most recent guidance update was released just before Christmas after receiving revised demand forecast from the large shareholder and strategic partner, A2 Milk.
Since then, a number a new factors have emerged which are expected to hurt FY21 profit.
There is ongoing uncertainty of A2 Milk’s expected demand for the rest of FY21 and FY22, as it continues to rebalance its inventory levels and recovers from the impact of COVID-19 on the sale channels of the daigou and CBEC channels.
The resulting impact of the above on Synlait’s manufacturing recoveries, which sees infant formula base powder production dropping significantly as outputs and inventory levels reset to a new outlook.
Another impact has been the disruption on global shipping, causing delays, which is expected to continue for some time and may still further impact the FY21 result.
Finally, there is ongoing volatility in commodity prices.
So what is Synlait expecting?
Given the significant volatility and uncertainty that’s affecting Synlait, the board and management can see that a broad range of outcomes is possible in FY21.
But, it said that the company’s previous guidance, that the overall FY21 net profit result will be approximately half that of the FY20 net profit, will now not be attainable.
What does this mean for A2 Milk and the share price?
Well, it’s not good for a number of reasons. A2 Milk owns a sizeable amount of Synlait shares, so this could mean a reduction in the value of what A2 Milk owns.
It also suggests that things are looking like they’re getting worse rather than better for Synlait and therefore A2 Milk.
A2 Milk shares could yet drift lower than it already has. It’s hard to say when things will recover for A2 Milk, particularly in the daigou and CBEC channels. Brave investors may see an opportunity, but things could continue to be volatile until at least the release of the FY21 result.