A2 Milk remains in influential MSCI index, for now

A2 Milk has remained in the MSCI index, which is used extensively by exchange traded funds to weight their investments, but its days of being part of the influential benchmark may be numbered.

The alternative milk company’s shares have languished in recent months after peaking at $21.50 last August as its profitability became increasingly challenged, giving rise to speculation that it may be removed from the index.

The index is reviewed quarterly – in February, May, August and November.

In the May and November semi-annual reviews, the index is rebalanced and the large and mid capitalisation cut-off points are recalculated.

Results of a review out today show a2 Milk has remained in the index.

The MSCI review process sees trading volumes in the constituent stocks put under the spotlight in the last 10 days of April.

“The analysis was that a2 Milk was likely be above the cut-off on some days and below the cut off on others,” Salt Funds managing director Matt Goodson said.

“It was pretty much a line-ball call as to whether it came out or stayed.

“However, since then, given the downgrades, unless something changes in the interim over the next six months – and six months is a long time in the financial markets – it is likely that it will come out.

“Between now and then I suggest that there will be a lot more fundamental news and we may get a sense as to whether the business has bottomed out or has other issues to deal with.”

The other MSCI New Zealand constituents are F&P Healthcare, Auckland International Airport, Spark, Meridian Energy, Ryman Healthcare and Mercury NZ.

Monday’s earnings downgrade, which brokers estimate will take a2 Milk’s net profit for the June year down to about $97m from last year’s profit of $385.8m, overshadowed any concerns about possible changes to the MSCI index.

Brokers Forsyth Barr noted that a2 milk had downgradedits 2021 guidance for the fourth time since September 2020, with no signs of a turnaround in well-signalled issues, meaning a2 Milk was taking greater corrective action at the expense of short-term profit.

“A2 Milk has a number of redeeming features, including strong free cashflow, attractive returns, a highly-regarded brand and optionality provided by a net cash position,” the broker said.

“However, the substantial re-basing of earnings and feasible future growth has been rapid and painful.

“Opaque/complex channels to market, an increasingly difficult macro backdrop and a strategy review amplify the near-term uncertainty.

“Any signs of a stabilisation in infant formula revenue and/or return to growth could be a positive catalyst, however, we think this is still some time away.”

The broker expects a2 Milk’s net profit to come in at $97.9m in the current year to June 30.

However, Forsyth Barr sees a2 Milk’s net profit rebounding to $197.9m in 2022 and $241.8m in 2023.

Jarden noted the downgrade was due to a poor April and an inventory review suggesting higher excess inventory and older product.

“The positive feature for us is the company accepting the inventory issues and now taking more aggressive corrective actions to protect its future brand health,” he said.

Shares in a2 Milk last traded at $6.37, up 18c or 2.9 per cent on Tuesday’s close.

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