The A2 Milk Company Ltd (ASX: A2M) share price is under the spotlight after making an announcement about its FY23 guidance.
A2 Milk uses the services of dairy product manufacturer Synlait Milk Ltd (ASX: SM1), and is also a major shareholder of Synlait.
Reassurance for investors
Synlait recently announced its thoughts and guidance on the FY23 net profit after tax (NPAT).
A2 Milk noted that Synlait referred to:
“Further advanced nutrition demand reductions, mostly from one of Synlait’s customers, which impact consumer-packaged infant formula volumes and base powder production, are expected to have an NPAT impact of approximately $16.5 million in FY23.
“The remainder of the NPAT impact (approximately $3.5 million) is attributable to less material factors, including higher financing and supply chain costs.”
A2 Milk also pointed out that Synlait said that the Chinese “State Administration for Market Regulation (SAMR) re-registration process remains on track, the on-site audit process is complete and Synlait still expects to receive re-registration and commence production in the FY23 fourth quarter, subject to SAMR approval.”
A2 Milk’s response
The infant formula business said that in the two forecasts provided by A2 Milk to Synlait since Synlait’s previous guidance update on 17 March 2023, A2 Milk lowered its total forecast production volume needs for English label consumer-packed infant formula for March, April, May and June 2023 production months by around 1,650 metric tonnes in total, which is less than 5% of Synlait’s reported advanced nutritional sales volumes over the 12 months to 31 January 2023. A decline in products could be bad news for the A2 Milk share price.
A2 Milk explained this reduction was due to three reasons:
- Continued weakness in the ANZ daigou / reseller market which is “down 49% in the most recently reported quarter from Kantar”
- The impact of significantly cumulative delays in English label consumer-packaged infant formula deliveries from Synlait to A2 Milk over an extended period expected to be fulfilled in the fourth quarter of FY23 resulting in a material amount of inventory arriving within a relatively short period which needs to be managed
- Ongoing refinement of the company’s English label distribution model resulting in more customers and distributors being supplied directly out of Hong Kong and China, leading to lower future A2 Milk and channel inventory requirements
But, it did recently confirm its forecast demand based on the starting of China label consumer-packaged infant production in line with previously anticipated timing to receive SAMR re-registration and start of production in Synlait’s FY23 fourth quarter.
A2 Milk is also in discussions with Synlait about the allocation of certain one-off production, supply chain and other related costs between the two companies.
Taking all that into account, A2 Milk said that there is no change to its FY23 outlook, with revenue guidance of low double digit growth.
But English label infant formula revenue is “now expected to be down mid-single digits partially offset by continued strong double-digit growth in China label infant formula revenue.” Revenue growth is expected to be at the low end of its previous expectations, around 10%.
Final thoughts on the A2 Milk share price
It’s not a surprise that A2 Milk shares are down in response to this news, considering the low end of the revenue guidance also likely means lower EBITDA (EBITDA explained) and lower net profit than it could have been.
I don’t think A2 Milk shares are worth buying with the ongoing difficulties. There are other ASX growth shares I’d rather invest in.
