New Zealand's A2 Milk Dashes Revenue Hopes, Shares Drop 20%

New Zealand dairy firm a2 Milk Company Ltd dashed market expectations on Wednesday with a forecast for annual revenue growth of more than 63 percent, sending its shares to a three-month low.

a2, which relies heavily on sales to China, said it expected revenue for the 2018 financial year of NZ$900 million ($617.4 million) to NZ$920 million, compared with NZ$549.5 million the previous year.

The firm released the forecast after noticing that some analysts expected revenue as high as NZ$950 million, spokesman Barry Akers said.

The stock dropped 20 percent to a three-month low shortly after the market opened, before recovering slightly to NZ$11.48. Shares in Synlait Milk, which has a supply arrangement with a2, dropped 5 percent to NZ$10.22.

“Everyone’s been too optimistic, the stock has been over-hyped and people expect upgrades constantly and clearly this is not an upgrade,” said Mark Brown, chief investment officer at Devon Funds Management, which owns a2 shares. The drop in a2 shares also weighed on New Zealand’s benchmark S&P/NZX 50 index, which fell as much as 2.3 percent to an almost two-week trough, before paring some of its losses to trade down 1.3 percent.

Disappointment

a2’s revenues more than tripled in the three years to June 2017 as its infant formula was embraced by Chinese parents, driving its shares up more than 600 percent since the start of 2016.

However, the company said on Wednesday that higher marketing costs and slower sales were starting to drag.

It expects to spend about NZ$82 million to NZ$87 million on marketing for the full year, including a video billboard campaign in Hong Kong and increasing its presence in Chinese stores with “Push Girls”, or sales assistants that work on behalf of a brand.

The forecast revenue also reflected the impact of seasonal sales in China, which are weighted towards the first half of the financial year.

“It’s a disappointment with respect to their sales as well,” Brown said, noting that export data tracked by Devon Funds suggested direct sales to China had slowed compared to the end of 2017.

($1 = 1.4579 New Zealand dollars)