How has Coronavirus impacted infant formula stocks?

Due to the outbreak of Coronavirus in China, there is an increased demand for essential items such as infant formula products. The alarming public health concerns have caused the foot traffic in mother and baby stores to increase substantially. Despite this, some companies are witnessing significantly lower than anticipated infant base powder sales, mainly due to the reduction in demand from brand owners who are yet to receive brand registration.

Let’s take a quick look at how Coronavirus has impacted infant formula stocks on ASX.

Synlait Milk Limited (ASX: SM1)

A leading high value dairy products provider, Synlait Milk Limited recently informed that its HY20 results will be impacted by:

• increased incremental interest, manufacturing and SG&A costs associated with the Pokeno and advanced liquid dairy packaging facilities;
• lower sales volumes of ingredient products than anticipated due to sales phasing and product mix impacts;
• lower sales of infant base powders due to the China infant nutrition market consolidation.

The company has confirmed that there has been no material short-term impact on its financial performance in connection with the Coronavirus outbreak, but the company is carefully monitoring the spread of Coronavirus, and the risk it poses to Synlait’s business.

The company expects its NPAT for the six months ended 31 January 2020 to be in between $26.5 million to $28.5 million. Further, the company is expecting growth in consumer-packaged infant formula sales volumes over the full year and expects its FY20 earnings to be in the range of $70 million and $85 million net profit after tax. Factors contributing to this performance include:

• incremental costs of the new Pokeno facility impacting standard manufacturing costs;
• higher SG&A costs due to increased business size and the continued focus on investing in future growth opportunities;
• lower sales of infant base powders due to the China infant nutrition market consolidation;
• a positive impact of a full year of operation of the expanded lactoferrin facility, albeit with more pricing volatility.

After the release of its updated outlook, the company witnessed a fall of 18.76% in its share price during today’s intraday trading. At market close on 13 February 2020, SM1’s stock was trading at $6.540.

The a2 Milk Company Limited (ASX: A2M)

Australia’s leading infant nutrition company, the a2 Milk Company Limited (ASX:A2M) has responded to Synlait Milk’s updated guidance, wherein it has confirmed that its business performance remains strong and it continues to be in compliance with its continuous disclosure obligation. The company is planning to release its results for the half year ended 31 December 2019 on 27 February 2020 and will make further comment on the business at that time.

A2M’s FY20 Outlook

• 1H20 revenue in the range of $780 million to $800 million with growth demonstrating strong performance against strategy;
• Full year EBITDA margin % anticipated to be stronger than previously communicated and in the range of 29-30%;
• 1H20 EBITDA margin % expected to be higher than FY20 and in the range of 31-32%.

AT the recently held AGM, the company had informed that its China strategy entails building a broad reaching China-based business to serve its consumers across all core retail channels. This strategy is designed to ensure we are serving the full addressable market and building its business to evolve dynamically in a fast-changing consumer world in China.

At market close on 13 February 2020, A2M’s stock was trading at $15.200 with a market cap of around $11.16 billion.

Bubs Australia Limited (ASX: BUB)

In a recent released investors presentation, Bubs Australia Limited assured that there have been no interruptions to its supply chain or change to its sales demand forecast or outlook to date, due to the outbreak of Coronavirus. The company is closely monitoring the emergence of Coronavirus and working closely with its key partners to ascertain its impact on its business operations and distribution channels.

The company’s material market position in Goat Dairy, a scarce resource and emerging commodity, provides Bubs® with a unique advantage to combat increased competition and declining birth rates in China, given it is positioned in the highest value segment of specialist ultra-premium infant formula, which continues to experience high value category growth.

The company’s direct sales to China in the first half of FY20 increased by around 19% on pcp demonstrating strong traction with Chinese consumers following the establishment of new partnerships with Alibaba Tmall and Beingmate, and deployment of increased marketing resources.

It is important to note that, as a trusted authentic brand with transparent supply chain visibility, Bubs® is placed well to cater to Chinese consumers’ heightened focus on their health, immunity, and food security, particularly when it comes to nourishing their children.

Blackmores Limited (ASX: BKL)

Australian health supplements company, Blackmores Limited recently downgraded full-year profit expectations to reflect adverse costs in addition to challenges associated with Coronavirus in the second-half.

The company expects its first-half statutory NPAT to be around $18.3 million with an underlying NPAT of $18 million. BKL expects its revenues in the second-half to be similar to that achieved in the first-half, though the significantly higher costs associated with manufacturing and other factors will have a material impact on the FY20 result. The company’s FY20 NPAT is expected to be in between $17 million to $21 million.

While informing about the impact of coronavirus, the company informed that the outbreak has resulted in increased demand for key immunity products in Australia and Asia, however the impact of the sales has been countered by supply chain disruptions across the region as a result of the contagion.

In China, local guidance for businesses and schools for people to stay at home for at least the remainder of February has led to a series of interruptions. Channels which rely on free flow of passengers (duty free, small business traders and tourists) have been impacted. Some e-commerce partners have cancelled or modified February promotions with a slowdown of China inbound and internal freight, which has made it difficult to serve the local market demand with much needed product.

At market close on 13 February 2020, BKL’s stock was trading at a market price of $76.970.

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