Dairy Companies Eye a Good 2021 due to their innovative strategies

Summary

  • 2020 was a good year for the dairy industry with prices of dairy products going up due to increase in demand from China and Asia.
  • SML updated its guidance downwards but it’s confident of achieving medium to long-term objectives.
  • A2 Milk Company is embarking on ambitious expansion plans while Fonterra Co-operative Group is diversifying its products portfolio.

Dairy is one of the major primary industries of New Zealand, which employs a large number of people and contributes around NZ$18B to the country’s economy. It operates mainly pasture-based farming and large-scale processing facilities. NZ dairy industry has a significant place in the global market place.

2019/2020 was one of the best years for the industry, despite a decline in number of cows. This industry produced the best milk and milk products and continued to meet domestic as well as some of the global demand, despite COVID-19 restrictions.

Not only was the last year good from production’s point of view but was also good from the perspective of prices farmers got for their milk products due to increase in demand from China and Asia. The industry continues to grow because the farmers are placing more stress on productivity and efficiency.

The industry is poised for further growth as farmers introduce innovative ways of improving yield and the industry introduces new products in the market.

In this backdrop, let us discuss three stocks to watch out for in the dairy sector:

Synlait Milk Limited

Canterbury-based Synlait Milk Limited (NZX:SML) is a milk production company. The Company produces, processes, markets, and distributes milk, milk powder products, and ingredients. The Company is present in several locations in Canterbury, Auckland,  Christchurch, Dunsandel, and other locations.

SML in its revised guidance for FY2021 highlighted a decline in the total volumes of packaged infant formula by almost 35% as compared to FY20, resulting in Net profit after tax to decline by almost half.

Manufacturing and demand for SML’s other consumer goods businesses and items such as lactoferrin will continue at the same level. The updated guidance reflects the impact of COVID-19 on one of its products, but with improvement in the situation it is subject to change.

The Company’s management and board is focussed on diversification of its products, asset optimization, and managing costs.

Also Read: Synlait Milk settles long-standing land dispute confidentially 

The Company is confident of delivering its medium-term and long-term objectives.

On 18 January 2020, SML closed the day’s trading at NZ$4.70, down 1.26% from the previous close.

The a2 Milk Company

The a2 milk Company (NZX:ATM) is a dual-listed company on Australian as well as NZ stock exchanges. The Company’s main product includes a2 Milk, which has only A2 Protein. The company has both the milk and infant formula categories. The Company’s markets are across Australia, China, and other Asian markets.

Of late, the Company entered into an agreement for the acquisition of 75% stake in Mataura Valley Milk.

This acquisition, besides aiding ATM’s venture into nutritional products, is also aimed at cementing association with China, and providing the perfect geographical advantage for trade. This deal will enable the Company to acquire a world-class facility for nutritional products. It will help a2 in partnering with China’s CAHG, something which will help in expanding its business in China and other geographies.

In its revised update for FY21, the Company expects to do better in 2Q21. The Company revenue is forecast to be NZ$1.40 billion to $1.55 billion and EBITDA margin for FY21 of between 26 per cent and 29 per cent.

Also Read: NZ Companies with High ROE- SPK, PPH & ATM

These exclude cost of stake acquisition in Mataura Valley Milk Limited. In the medium -- the Company plans to grow from 26% to 30% EBIDTA.

All these guidance are despite the COVID-19-induced headwinds. According to the Company, the strength of the brand and the fundamentals of the business remain very strong in the medium- to long-term.

On 18 January 2020, ATM closed the day’s trading at NZ$ 10.750, down 2.36% from the previous close.

Fonterra Cooperative Group

The Fonterra Coperative Group (NZX: FCG), a dairy brand of global dairy nutrition, is diversifying its product portfolio. As recently as January 12, it announced that it was introducing milk phospholipids in the US market to help food brands offer products with stress management agents.

Milk phospholipids are thick lipids, which provide a range of health benefits and are a part of milk. This lipid helps in coping with stress and enable the consumers to stay focused and cheerful.

Some of its brands that deal in high quality nutritious dairy products are already selling well in Australia.

Earlier in December 2020, Fonterra together with Neste and DairyNZ had gone in for some environmental and green initiatives, like development of plantain trial to help improvement of waterways and lower on-farm greenhouse gas emissions.

Also Read: Fonterra Co-Operative Makes Environmental Progress

Plantain is the herb with a fibrous and rough root system, which grows all over New Zealand. It is ideally suited to dairy farm circumstances where milk production is constrained by the quantity and consistency of summer feed. Plantain-based pastures have proven to be useful in lowering nitrate leaching while maintaining or increasing milk solids production. This is expected to increase the yield in summer months.

On 18 January 2020, FCG closed the day’s trading flat at NZ$4.40.

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