As per the release published on the official website of New Zealand government, Dairy export revenue has been estimated to increase by 6.3 per cent to $19.2 billion for the year ending 30th June 2020. This is would be driven by strong domestic production as well as favourable export prices to December. The forecast has been decreased by $390 million due to weakened international dairy prices led by COVID-19 pandemic and anticipated lower production due to dry and hot conditions throughout the country.
We will now provide some information on the two dairy companies which are listed on NZX. Let us start with The a2 Milk Company Limited.
The a2 Milk Company Limited (NZX: ATM)
The a2 Milk Company Limited (NZX: ATM) is engaged in the sale of branded products in targeted markets made with milk from cows that produce milk naturally containing only the A2 protein type. The market capitalisation of the company stood at ~$12.126 billion as on 27th March 2020.
The a2 Milk Company Increases Its Investment in Synlait Milk
The company has increased its stake in Synlait Milk Limited and it has made the acquisition of shares on market at the price of NZ$4.95 per share, which is below a2MC’s average entry price for its interest in Synlait. This increases its interest in Synlait from 17.4 per cent to 19.84 per cent.
Because of the recent decline in Synlait’s share price, the company saw it as an opportunity to complete strategic holding. The company has no plans of increasing its stake in Synlait Milk beyond 19.9%.
ATM Enters into An Exclusive Licensing Agreement
The company has recently made an announcement that it has entered into an exclusive licensing agreement with Agrifoods Cooperative for production, distribution, sale and marketing of a2 Milk™ branded liquid milk for Canadian market. As per the release, the agreement would be giving the company a capability to leverage the brand development work it has previously undertaken in North America as well as grow into Canadian market.
It is estimated that a range of liquid milk products would be rolled out later this calendar year.
ATM Releases Results for Half-Year Ended December 31, 2019
For the half-year ended December 31, 2019, The a2 Milk Company Limited reported gains in the revenue and earnings, and it witnessed strong performances in key product segments of infant nutrition and liquid milk, and across core markets. Total revenue increased by 31.6% to $806.7 million and EBITDA increased by 20.5% to $263.2 million.
The overall results indicate continued growth in infant nutrition category and its sales stood at $659.2 million in the 1H, reflecting a rise of 33.1% on pcp. The gross margins also witnessed an improvement to 57.2% because of continued mix shift to infant formula, as well as improved price yield. EBITDA margin stood at 32.6% and was better than anticipated due to greater underlying gross margin.
Financial Summary (Source: Company’s Report)
What to Expect
The company is anticipating continued strong revenue growth throughout the key regions because of increased marketing investment in China and the USA as well as the ongoing development of organisational capability to support execution of strategy. As per the release, there has been uncertainty about the potential impact to supply chains as well as consumer demand in China as a result of COVID-19 pandemic and ATM has been examining the situation. The company is expecting EBITDA margins for the full year in the range of 29% to 30%.
Synlait Milk Limited (NZX: SML)
Synlait Milk Limited is manufacturer and it is focused towards supplying high value fully finished infant formulas as well as dairy ingredients. The company has a market capitalisation of $989.774 million as on 27th March 2020.
SKL Registers Double-Digit Growth in Revenue
For the six months ended 31st January 2020, the company reported total revenue of $559 million, up by 19% and total milk processed rose 8.5%. The company’s core infant nutrition business continues to support growth, with sales of consumer-packaged infant formula up 22% on the same period last year. NPAT fell by 30% to $26.2 million, reflecting higher depreciation and interest costs as it invests for growth.
Key Metrics (Source: Company Reports)
Approval for Acquisition of Dairyworks
As per the recent release, The Overseas Investment Office has given consent to its purchase of the shares in Dairyworks Limited under the Overseas Investment Act 2005. Following are the key points which needs to be noted:
- Dairyworks specialises in processing, packaging as well as marketing of dairy goods;
- It supplies NZ consumers with about half of its cheese, quarter of its butter, as well as milk powder and ice cream.
Synlait has recently stated that the acquisition accelerates its diversification strategy achieving instant scale in the Everyday Dairy category. As per the release, Dairyworks has strong market presence in cheese, retail butter as well as grocery channels, reducing SML’s site, customer, product and market risk. Dairyworks brings an innovative, agile and nimble FMCG culture which would be helping SML in further expanding its category offerings and products. Moreover, the acquisition is financially attractive and immediately EPS accretive. Dairyworks has well-recognised brands and possesses a strong customer base. Notably, it would be a subsidiary of SML and will be operating as the stand-alone business. It has an experienced executive leadership team with deep dairy as well as consumer brands experience.
Outlook for Second Half and Full Year
The company is on track to deliver stronger sales of consumer packaged infant formula and lactoferrin in the second half of FY20.
FY20 EBITDA is expected to be stronger than FY19 due to higher sales of consumer packaged infant formula and lactoferrin offset by increased operational costs. Synlait has a strong and growing core business which has put it in the position of being able to invest for the future.