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A2 Milk stock slumps 20% as margin outlook disappoints

A2 Milk stock slumps 20% as margin outlook disappoints investors; Synlait falls

By Paul McBeth

May 16 (BusinessDesk) - A2 Milk Co shares shed about a fifth of their value after a trading update today disappointed investors optimistic about the milk marketing firm's outlook, dragging down production partner Synlait Milk and weighing on the broader market.

Shares of A2 fell 20 percent to $10.45 after the Auckland-based company said second-half gross margin will stay broadly in line with the first half and expansion plans in the US and China underpin higher marketing costs. Synlait, which processes infant formula for A2, dropped 5.2 percent to $10.19. The dairy companies were two of the stock market's strongest performers over the past year as A2 nears $1 billion in annual revenue, due largely to the success of selling infant formula to Chinese consumers.

"I think quite a few analysts were expecting things to be higher than that in terms of gross margin, and that basically means earnings forecasts from analysts are too high," said Mark Lister, head of private wealth at Craigs Investment Partners. "When the stock's had such a stunning run and is priced to perfection, everyone's excited and there's so much hype, it means that it's going to react much more sharply to any bad news or less positive news than what people are pricing in."

Before today, A2 shares had soared 62 percent so far this year, while Synlait was up 49 percent, compared to a 3.7 percent increase on the NZX50 over the same period. Those gains have meant the stocks attract a greater weighting on the S&P/NZX 50 index, which sank 2.2 percent to 8,515.55 as at 10.45am. The next biggest decline was a 1.2 percent dip in Vital Healthcare Property Trust to $2.01 and a 1.1 percent decline in Summerset Group Holdings to $7.15.

Lister said today's movement could be exaggerated further when Australia's ASX opens at midday NZ time, which typically posts sharper moves in stock prices.

Still, yesterday's MSCI index reweightings may limit the downside for A2 after it was added to a key global index meaning large institutional investors tracking those indices have to hold a certain amount of the company's shares.

(BusinessDesk)

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