Dairy Sector Players Resilient Amid COVID-19: SM1, A2M, KTD  

Summary

• Amid the global uncertainty created by COVID-19, dairy sector companies serve as an essential goods provider while implementing measures against the virus spread and maintaining high safety standards.
• Synlait Milk lowered forecast base milk price for the 2019 / 2020 season to $ 7.05 kgMS from $ 7.25 kgMS, and a conservative opening forecast for the 2020 / 2021 season set at $ 6.00 kgMS.
• a2 Milk Company registered robust revenue growth across all key regions, particularly in respect of infant nutrition products sold in China and Australia.
• Keytone Dairy received a follow-on purchase order from Nouriz (Shanghai) for ~$ 1.39 million, which is c.11.3x and c.1.6x greater than their first and second orders, respectively.

Dairy industry, which is now extensively globalising, actively contributes to the economy of a number of communities, regions and countries. During the challenging situation created by the coronavirus (COVID-19) pandemic, the industry persisted as one of the critical and essential product segments. It is a vital part of the global food system and plays a key role in the sustainability of rural areas in particular.

Let us cast an eye over the following prominent ASX-listed dairy sector players in Australia and their recent developments amid the uncertain operating landscape.

Synlait Milk Limited (ASX: SM1)

Synlait Milk Limited is an innovative and trusted dairy company, engaged in the production, processing, marketing and distribution of milk, milk powder products and ingredients.

SM1 Forecast Milk Price Update: On 28 May 2020, Synlait Milk informed to have updated its forecast base milk price for the 2019 / 2020 season to $ 7.05 kgMS from $ 7.25 kgMS.

SM1 CEO Leon Clement commented on the development, stating that the decision to reduce the forecast base milk price for the 2019/2020 season is in line with other commodities. Also, dairy prices have eased significantly this year, and as a result, they are lower than the Company was anticipating when the forecast was set in January 2020.

Furthermore, the Company’s opening forecast for the 2020 / 2021 season is $ 6.00 kgMS. Mr Clement also pointed out that the pandemic has created significant global uncertainty, and with no clear view of the economic impact, the Company decided to release a conservative opening forecast for the 2020 / 2021 season.

SM1 will continue to monitor movements and keep its farmer suppliers updated. Its final milk price for the 2019 / 2020 season would be confirmed in the Company’s full-year 2020 result in September 2020. Forecast for the 2020 / 2021 season would also be updated.

Synlait Uniting Against COVID-19: In a market update released in April 2020, Synlait highlighted that the Company takes the privilege and responsibility to operate as an essential service business very seriously.

The Company has implemented measures against the pandemic across all its operations such as limited all site access to teams essential to running and maintaining its operations, introduction of daily declarations as a prerequisite for anyone entering its sites, increased hygienic cleaning and sanitation practices across non-production workspaces, and extended advanced personal protection equipment controls.

Stock Information: With a market cap of $ 1.24 billion, the SM1 stock was trading at $ 6.800 on 25 June 2020 (AEST 02:33 PM), down by 1.306%.

The a2 Milk Company Limited (ASX: A2M)

The a2 Milk Company Limited is a premium branded dairy nutritional company, providing products that are free of a protein called beta casein A1 with distribution channels across Australia, New Zealand, China, Hong Kong, Singapore, United States, and the United Kingdom. A2M is also a consumer staples sector player that has offered an essential product throughout the COVID-19 pandemic.

Effective at the open on 22 June 2020, A2M was due for inclusion in S&P/ASX 50 Index, as per the recent changes in S&P/ASX indices announced by S&P Dow Jones Indices.

Trading Update & FY20 Outlook: A2M unveiled its last update on the Group’s trading performance and its full-year FY20 outlook with 1H FY20 results in late-February 2020.

Since then, the Company has recorded strong revenue growth across all key regions, particularly in respect of infant nutrition products sold in China and Australia, according to a Company update on 22 April 2020. As a result, the Group’s revenue for the three months to 31 March 2020 was above its expectations, which primarily demonstrated the impact of changes in consumer purchase behaviour arising from the pandemic situation and included an increase in pantry stocking of A2M products particularly through online and reseller channels.

During the reporting period, A2M’s China segment revenue, transacted in US dollars, was favourably impacted by a significant depreciation of the NZ dollar to the US dollar. The Group added that its overhead costs are now tracking lower than previously anticipated, owing to travel restrictions and some planned recruitment, particularly in China, being temporarily stalled.

As for FY20, outlook for both revenue and earnings remains uncertain amid the COVID-19 situation. Additionally, there is significant uncertainty around the potential impact on supply chains and consumer demand in the Group’s core markets and the resulting financial impact on its performance. Nevertheless, assuming that planned marketing activity for FY20 of $200 million, weighted to 2H20, will be fully expended prior to year-end, for FY20, the Group expects:

• Revenue to be in the range of $ 1,700 million to $1,750 million.
• EBITDA margin to be in the range of 31% to 32%, above that advised in February.

Stock Information: With a market capitalisation of around $ 13.4 billion, the A2M stock was trading on 25 June 2020 (AEST 02:48 PM) at $ 18.160, up 0.276%. A2M has generated six and three months return of 24.64% and 12.76%, respectively.

Keytone Dairy Corporation Limited (ASX: KTD)

Keytone Dairy Corporation is a well-known manufacturer and exporter of formulated dairy products as well as health and wellness products. It is based in Sydney and Melbourne in Australia and Christchurch in New Zealand.

Largest Nouriz China Order Update: Recently on 11 June 2020, the Group announced the receipt of a significant confirmed follow-on purchase order, valued at approximately $ 1,391,000, from Nouriz (Shanghai) Fine Food Co Ltd. The order value is c.11.3x and c.1.6x greater than their first and second orders, respectively. All orders would be manufactured in the Keytone New Zealand facilities through August 2020, that is during the second quarter of the FY21.

Nouriz, a related party of China Animal Husbandry Group, which is a China State Owned Enterprise, provides whole and skim milk powders under their Nouriz private label.

Do Read: Infant Formula Stocks: Keytone Dairy Share Price Seems to be Buzzing Today

Full-Year FY20 Results: Late-May 2020, Keytone announced its full-year accounts for the 12 months ended 31 March 2020, which turned out to be a record and transformational year for the Company. Significant sales growth was delivered across its diversified manufacturing base across five sites in ANZ in the health and wellness market, with core pillars in functional dairy, health and wellness powders and ready-to-drink products and a robust contract production business for 3^rd party private label client.

Key Highlights:

• Total sales for FY20 stood at $ 22.53 million, up from $ 2.51 million in the prior corresponding period (PCP).
• Onboarded significant new clients including Sam’s Club in China (Walmart China) and Nouriz (China) and other leading international health & wellness brands.

Besides, Keytone completed the construction of its state-of-the-art second manufacturing facility in New Zealand, with the first commercial run undertaken in late-FY20.

The group closed the year with a strong balance sheet and cash balance of $ 4.4 million as at 31 March 2020 and a well-supported capital raise of $ 12.5 million in May 2020 with scale backs applied.

Stock Information: With a market capitalisation of $ 65.43 million, the KTD stock was trading flat at $ 0.255 on 25 June 2020 (AEST 03:09 PM).

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