- The share price of The a2 Milk Company Limited (ASX:A2M, NXZ:ATM) has plummeted by over 18 per cent in 2020.
- The Company encountered a flow-on effect of pantry destocking and disruption to its corporate reseller/ daigou channel amidst COVID-driven restrictions in Australia.
- It is hard to neglect the Company’s exceptional performance over recent years.
As the year 2020 is approaching its end, the world is waiting with bated breath to breathe safely in the upcoming year. This is due to the havoc wreaked by the COVID-19 pandemic on countries worldwide that are now hoping for its sooner termination.
Undoubtedly, 2020 has been a challenging year for the Australian economy that dealt with surging unemployment levels, muted consumer spending and subdued demand. Besides the economy, the pandemic also left a grave impact on some ASX-listed businesses amid soft demand and closed international borders.
One such company is The a2 Milk Company Limited (ASX:A2M, NXZ:ATM) whose share price has plunged by over 18 per cent in 2020. The popular blue-chip stock, which was once over 40 per cent up on a YTD basis, has now slumped to a two-year low of ~A$11.48 (as on 31 December 2020).
Interestingly, while The a2 Milk Company has fallen heavily in 2020, the blue-chip stock seems to hold considerable potential to bounce back strongly over the mid to long term.
The a2 Milk Company encountered several issues related to its infant nutrition business during COVID-19 era.
These issues comprised the flow-on effect of pantry destocking which continued in FY 2021 post robust sales uptick in 3Q20. Moreover, reduced tourism and international student numbers from China led to lower-than-expected sales to retail daigous in Australia.
The Company also observed additional disruption to its corporate reseller/ daigou channel amidst prolonged Stage 4 lockdown in Victoria. It is worth noting that the daigou channel represents a substantial proportion of the Company’s infant nutrition sales in its ANZ business.
While The a2 Milk Company does not anticipate the strict and long lockdown in Victoria at present, it continues to expect short term softness in retail daigou channel. This is primarily due to COVID-19 related travel restrictions weighing heavily on travel between Australia and China.
The Company foresees little chances of a return of a large number of international tourists and students to Australia in FY 2021.
The a2 Milk Company delivered an impressive performance in FY 2020 despite COVID-driven headwinds. The Company made substantial gains in earnings and revenue, recording solid performances across all core markets and key product segments.
The Company reported an increase of 32.9 per cent in EBITDA to NZ$549.7 million and a rise of 32.8 per cent in revenue to NZ$1.73 billion. Interestingly, the Company’s infant nutrition revenue was up almost 34 per cent to NZ$1.42 billion on the prior corresponding period in FY 2020.
It is worth mentioning that The a2 Milk Company has delivered an exceptional performance over the recent years, with a single-minded focus on investing and building its unique and superior a2 brand.
Lately, the Company has also entered into binding agreements concerning the acquisition of a 75 per cent stake in dairy nutrition business, Mataura Valley Milk. The proposed acquisition is expected to strengthen the Company’s relationship with key partners in China. Besides, it unfurls an opportunity for a2MC to provide supplier and geographic diversification and join in nutritional products manufacturing.
As per The a2 Milk Company, its performance in China label in Mother & Baby Stores (MBS) remains very strong. Consequently, the Company anticipates a revenue growth in 1H21 to remain above 40 per cent on the prior corresponding period in this segment.
Besides, the Company continues to see a promising impact from the marketing investment in brand building and activation activities, supported by the on the ground capability investments it has made over the last 18-24 months.
Although The a2 Milk Company is likely to post a significant reduction in earnings and sale in FY 2021, it is hard to neglect the Company’s spectacular performance over the past years. The Company seems to be well positioned to manage COVID-19 challenges and may bounce back strongly as soon as the international restrictions ease and pandemic impact begins to recede.
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