Bullish a2 Milk pushes sharemarket to two-year high

A2 Milk delivered an unexpected early Christmas present for its shareholders on Friday after not only upgrading its earnings outlook for the year but also announcing it would pay a maiden dividend next February; a first for the company since listing in 2004.
Coming just days before the Reserve Bank is expected to cut the official cash rate by a further 50 points for a second time, investors were in party mode sending the NZX50 up 277 points or 2.2 percent to record its second best daily advance for the year.
And the momentum looks set to continue this week with market leader F&P Healthcare expected to announce a solid half–year result this Thursday.
It’s been a roller coaster year for a2 Milk investors with its shares starting out at $4.50 in January and then rallying hard to peak at $8.05 in late July, only to fall back to a low of $5.22 two weeks ago on growing concerns the impact China’s economic slowdown, it’s primary export market, was having on its earnings outlook.
In between, there’s been a long running dispute between a2 and its infant formula supplier Synlait which was finally settled in August and a weaker than expected full-year profit result in the same month that sent its shares sliding almost 20 percent on the day it was announced.
In late September a2 shares were placed in a trading halt prior to confirmation by the company it was in talks to acquire a manufacturing facility in China, and earlier this month there was growing speculation Canadian dairy giant Saputo was eyeing up a2 Milk with a view to a possible takeover.
However, fears of a slowdown in earnings were put to rest on Friday at the company’s annual meeting, following updated guidance which indicated year-to-date trading was tracking ahead of plan and its previous guidance provided in August. This was primarily due to a significant increase in external ingredient sales from its Mataura Valley plant, higher Global Dairy Trade prices, currency impacts and changes in its product mix.
A2 upgraded its full year revenue guidance to mid-high, single digit growth, from a mid-single digit increase after reporting a 5.2 percent increase in revenue for the year to the end of June.
Adding an extra sweetener to its earnings upgrade, a2 Milk also announced that it had established a dividend policy targeting a payout ratio range of between 60 and 80 percent of net profit after tax excluding non-recurring and other items (normalised NPAT).
Chair Pip Greenwood said the company had made considerable progress in developing its operating model and creating a more resilient business.
“Given this progress and our strong balance sheet position, the Board believes the time is right to introduce a dividend policy that delivers sustainable cash returns to shareholders over time.”
Greenwood said a2’s Board remains conscious of its significant cash balance of almost $1 billion (up almost 20 percent on a year ago), which is being prioritised for supply chain transformation, growth opportunities and risk mitigation.
And there was a further hint to shareholders there may be more good news in store on the dividend front in the future.
“As the company executes its strategy and risk evolves, the Board will continue to review capital management options which may result in further capital returns to shareholders, likely in the form of special dividends, over time.”
A2 Milk shares closed on Friday at $6.29 up 18 percent for the week. Year-to-date the shares have gained 40 percent, though they remain almost 20 percent below their high for the year of $8.05 in late July.
There appears to be little debate amongst economists regarding this Wednesday’s final monetary policy statement for the year, with the Reserve Bank widely expected to cut the OCR by a further 50 points.
In doing so, it will be the central bank’s second straight 50 point cut and there is every likelihood the RBNZ will follow this with a third 50 point cut in February according to Kiwibank economist Jarrod Kerr, who couldn’t resist being a little melodramatic in his assessment of the outlook for the OCR.
“We believe the RBNZ actions from October to February [next year] times beautifully to Tchaikovsky’s famous 1812 overture, well the last minute of it. Each cannon blast reflecting a 50bp cut. Each blast is flanked by furiously upbeat violins. And each violin stroke inspires us to charge into next year. Because next year will be a better year… by RBNZ design.”
Kerr is also keen to hear from the Reserve Bank regarding its outlook for next year.
“The updated OCR track will highlight where the RBNZ sees interest rates going over the next 2 years. And despite its claim of the ‘spurious accuracy’ of the OCR track, or the complete 180 degree turns we’ve had from previous OCR tracks, it’s the best mud map the RBNZ can provide for the future path of rates. One we can then pick apart and debate.”
Of course, the ‘wildcard’ that has emerged in recent weeks is the return of US President elect Donald Trump to the White House, which risks significant damage to the global trading outlook should he decide to implement his plans for an aggressive new tariff policy.
Kerr expects the kiwi dollar, which fell to a one–year low of 58.4 US cents over the weekend, will continue to weaken in response to a strengthening US dollar.
“Over recent weeks, US wholesale rates have catapulted higher on growing fears of Trumpflation. And only God knows how the tariff trade wars will play out. But if the RBNZ cut as we expect, and signal more to come, we’d expect to see Kiwi rates holding in a lowering range, compared to the US. And that widening rate differential will enforce the weakish tone in Kiwi currency crosses. Anything less than 50bps next week, or a signal of fewer cuts to come next year, would cause a massive move in Kiwi rates, in the wrong direction (higher).”
Adding to concerns about the outlook for the NZ economy going into next year are growing concerns about the health of the labour market.
New figures out last week revealed job ads are down 26.2% on a year ago, after a decline of 1.4% month on month in October.
BNZ Head of Research Stephen Topliss said the new data confirms ongoing loosening in the labour market.
“Last week, the Treasury noted that “recent second-tier data has been suggestive of a turning point in the economy.” That might well be true, and employment intentions have improved in some recent business surveys, but we continue to expect the labour market to lag the broader economic recovery. October’s job ads support that view.”
In the year to September 2024, employment contracted 0.4 percent, the biggest decline since March 2010, while the annual contraction in full-time employment was even greater at 0.7 percent. Job ads for full-time work have declined more sharply over the past year relative to part-time positions.
The unemployment rate rose to 4.8 percent in the September quarter from 4.6 percent in the previous quarter, and Toplis said BNZ’s economic forecasts remain for this to peak at around 5.5 percent next year.
Regarding this week’s final monetary policy statement for the year, Toplis warns that the emergence of potential green shoots risks being undone by “…the death throes of the past season’s crop.”
“Forward indicators for the economy are growing in strength but today’s news is far from optimistic. Lags in the system will ensure there are many more people yet to lose their jobs, and there is substantial ongoing risk of increased business failures. This is a challenging time for the central bank. There is no doubt further easing will be required to fertilise the new growth but there is very little clarity as to the requisite pace or extent of that easing.”
Watch for the Reserve Bank on Wednesday to try and improve that clarity going into next year.
Northvolt, once seen as Europe’s brightest hope to compete with China in the competitive battery technology market, collapsed into bankruptcy over the weekend sending ripples through financial markets, including US banking giant Goldman Sachs which is expected to take a US$1 billion hit from the company’s demise.
Peter Carlsson, a former Tesla executive who co-founded Northvolt in 2016, resigned in the wake of the collapse, warning that the continent’s green industrial transition is at risk from what he described as “dithering policymakers, carmakers and investors.”
While admitting to mistakes at the start-up, Carlsson urged Europe to look beyond the current weakness in EV sales and not to abandon its dream of creating a battery champion to fight dominant Asian rivals, saying that he still had faith in the objective.
“There’s more hesitation and questions on the speed of the transition from carmakers, from policymakers, and from the investment community. That affects us. We will regret in 20 years if we do not continually lean forward and dare to drive the green transition,” he told reporters.
The Swedish group became a symbol for Europe’s green transition hopes and the continent’s efforts to protect its automotive industry – which employs almost 14 million workers – by competing in electric vehicle technology against well-established Chinese companies such as CATL and BYD.
Christian Ehler, a conservative Bavarian MEP told the Financial Times that Northvolt’s Chapter 11 filing, albeit partly caused by questionable entrepreneurial decisions, is symptomatic of the problems that European clean tech companies face.
“Next to the erosion of our existing industrial base, we are now faced with the washing away of our clean tech ambitions.”
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