Farm Ireland

Monday 23 July 2018

New Zealand dairy processor logs record profit after making the right bets on China

Colin Packham

New Zealand's a2 Milk Co Ltd said annual profit tripled to record levels on soaring demand for its infant formula products in China and also unveiled a share buyback that propelled its stock, already an investor favourite, higher.

A2 is widely viewed as having made the right bets with its China strategy, placing informal 'daigou' shopping agents at the centre of its distribution efforts, while some rivals have been caught out by new China's registration laws that caused many in the sector to dump their product.

Record earnings for a2 come amid a stronger dairy market, underpinned by a tightening of global supplies that pushed prices up 50pc last year.

Its net profit after tax rose to NZ$90.6m for the year ended June on a 56pc jump in revenue, and beat an average estimate of NZ$81.5m from three analysts polled by Thomson Reuters I/B/E/S.

"Demand growth for dairy in developed markets will remain strong, reducing export surpluses and countering more sporadic demand growth in developing markets," said Michael Harvey, dairy analyst at Rabobank.

The better-than-expected results and a planned NZ$40m share buyback lifted a2 shares as much as 5.9pc to a record high of NZ$5.2.

Gains were later paired to NZ$5.1, giving the company a market value of some NZ$3.6 billion. The stock has rise roughly 140pc this year alone.

Managing Director Geoffrey Babidge said in a statement the company's profits had been aided by a close relationship with daigou who post its products to the mainland.

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In contrast, Bellamy's Australia sought to sell directly to Asian consumers via e-commerce channels. But with products often more expensive than buying via a diagou, Chinese consumers largely shunned the Australian dairy brand.

A2 said China remained a key focus next year as it forecast "continued growth", but it said it was conscious of the potential harm to the sector caused by counterfeit infant formula.

The quality of milk and infant formula in China has been a sensitive topic after a series of scandals from 2008 when milk contaminated by the industrial chemical melamine killed at least six children and caused thousands to fall ill.


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