A2 shares spike 10% on receiving approval

A2 Milk Company managing director Geoffrey Babidge. Photo supplied.
A2 Milk Company managing director Geoffrey Babidge. Photo supplied.

Shares in the A2 Milk Company spiked almost 10% yesterday - from a 15-month low - after the announcement it had clinched Chinese regulatory approval to export infant milk formula.

China banned unregistered imports of milk formula about three months ago, in the wake of the Fonterra botulism scare, and subsequently required proof of closer links between makers, importers and their brands, to underpin heightened food safety requirements.

The A2 shares rose to an intraday high of 68c yesterday and closed up 4c at 65c.

Synlait Milk, A2's manufacturing partner of its a2 Platinum infant formula, is expected to receive similar registration shortly, having recently gained Ministry for Primary Industries' risk management plan approval.

Before the May 1 implementation date for new registrations in China, A2 had earlier put stock of its a2 Platinum infant formula in China and the next shipment had been scheduled to arrive before May 1.

A2 managing director, Geoffrey Babidge, said the market development programme had ''paused'' while the registration process was in progress, and would now be ''reactivated''.

''Registration will provide an important confidence boost for our distribution partner China State Farm and its sub-distributors in our target markets in China,'' he said.

A2 and Christchurch-based Synlait missed out in the first round of licensing, as they waited for Synlait's new dry blending and packaging factory to be built, and inspected by local food safety authorities, APNZ reported.

At the time it missed the initial registration round, A2 said its distribution partner held sufficient infant formula ''to ensure consumer demand in China continues to be satisfied''.

Craigs Investment Partners broker Peter McIntyre said it was ''imperative'', that A2 gained the Chinese approval, noting its shares had ''rocketed'' to 68c yesterday after the announcement.

The new Chinese regulations reflected just how importantly China viewed its large and expanding infant formula market, and that it wanted protections in place.

Mr McIntyre highlighted that A2, and Synlait when it gets its registration, must work hard to maintain that approval throughout the manufacturing, processing and delivery of future exports.

''With most of A2 and Synlait's [future] earnings coming from China, it's important they maintain this approval,'' he said.

Forsyth Barr broker Andrew Rooney said A2 inventory for China which had previously been earmarked as ''potentially worthless'', had effectively been cleared for export, by yesterday's announcement.

''It's a pleasing result and should ensure that confidence in distribution relationships is boosted and market development can be re-energised,'' Mr Rooney said.

He noted that before the regulation period more than 800 brands were being exported to China, while post-regulation, A2 was now one of about 100 to have received regulatory Chinese approval.

''This achievement essentially adds an additional barrier to entry to [other] competitors'', Mr Rooney said.

He said while Synlait was yet to gain Chinese registration, the interim contract provider, New Zealand New Milk Ltd, had gained registration.

New Zealand New Milk is sub-contracted to package Synlait product, which meant infant formula could be packaged from its plant on behalf of A2, then exported, Mr Rooney said.

''The A2 Milk Company expects to export its first infant formula shipment postregistration in August,'' he said.

The A2 inventory produced before the May 1 deadline had also been ''signed off''' and Mr Rooney expected a ''ramping up'' by main distributors China State Farm, sub-distributors and the broader retail network.

In January, Synlait flagged sales of baby formula would fall below its 10,000-tonne target this year as the stricter Chinese regulations caused ''considerable disruption'', and forecast annual profit of between $30 million and $35 million, for the year ending July 31, APNZ reported.

Since then the company has issued two profit warnings: in March to an estimate of between $25 million and $30 million, and in May it further cut its forecast to between $17.5 million and $22.5 million.

Its prospectus forecast profit was $19.8 million.

The full-year financial results of A2 are due for release in the last week of August.

simon.hartley@odt.co.nz

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