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UPDATE: A2 Milk shares rise from 15-mth low on China licence

UPDATE: A2 Milk shares bounce from 15-month low on Chinese licence; Synlait still waiting

(Updates with share movement, broker comment)

By Suze Metherell

July 22 (BusinessDesk) - Shares in A2 Milk Co jumped 9.8 percent from a 15-month low on news the milk marketer has won Chinese regulatory approval to export its a2 Platinum infant formula. Milk processor Synlait Milk is still waiting for registration.

The Auckland-based company has been included in the list of approved imported brands issued by the China General Administration of Quality Inspection and Quarantine, it said in a statement. The approval comes three months after China tightened its rules, banning unregistered imports of infant formula, and required brands and importers to show close links with the product's manufacturer in a bid to bolster food safety in the country's rapidly expanding baby powder market.

The shares rose 6 cents to 67 cents in early trading on the NZX, having dropped to its lowest since April last year at the close of trading yesterday. The stock climbed some 52 percent in 2013 as investors chased growth, but has come under pressure in recent months as investors question the high valuations of stocks relative to earnings. Synlait Milk shares rose 0.3 percent to $3.31.

"It's very good news - it really does confirm they're able to export into that market, which is probably the largest market for baby formula market in the world," said Grant Williamson, director at Hamilton Hindin Greene. "The companies that are in the higher risk category have been coming under a bit of pressure, particularly with the local market easing off somewhat. Investors have been looking to de-risk their portfolios and take profits on some of the higher growth companies, and that's hit A2.

"They're considered a high growth stock, and with that comes risk, their strategy in some markets may not pay off," Williamson said. "It's what you consider a greater risk than a more mature company."

A2 Milk 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. Earlier this month, the manufacturer's interim contract provider, Auckland-based New Zealand New Milk, gained Chinese registration, clearing the way for A2 Milk. At the time it missed the initial round of registration A2 Milk said there was enough infant formula held by its distribution partner "to ensure consumer demand in China continues to be satisfied".

"Registration will provide an important confidence boost for our distribution partner China State Farm and its sub-distributors in our target markets in China," A2 Milk managing director Geoffrey Babidge said in a statement. "The market development programme paused while the registration process was progressing and can now be reactivated together."

Synlait is expected to be licensed once its risk management plan is approved by the Ministry for Primary Industries, A2 Milk said.

In January, Synlait flagged sales of baby formula would fall below its 10,000 metric tonne target this year as the stricter Chinese regulations caused “considerable disruption” in that market, and forecast annual profit of between $30 million to $35 million, for the year ending July 31. Since then the company has issued two profit warnings, first in March to an estimate of between $25 million and $30 million, and in May it further cut its to between $17.5 million and $22.5 million. Its prospectus forecast profit of $19.8 million.

The company said the high kiwi dollar and volatility in global dairy prices, as well as a reduced advantage from its product mix, had weighed on revenue and forecast earnings.

The first New Zealand exporters and manufacturers to gain registration in April were Sutton Group and Gardians, Danone-subsidiary Nutricia, Fonterra Cooperative Group, GMP Pharmaceuticals and Dairy Goat Cooperative (NZ), representing about 90 percent of New Zealand’s infant formula exports to China by volume. Since then Westland Milk has also been approved.


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