ASX200 Player a2 Milk Company’s Share Price Plummets ~11% On Bleak 2021 Outlook

Summary

  • The a2M Milk Company’s shares tumbled on the ASX today following its bleak 2021 outlook. The shares dipped by over 11% by the market close on 28 September 2020.
  • Due to COVID-19 and moderation of economic activity, the Company feels that it could experience several impacts in FY2021.
  • In September, A2M has seen further interruption in the corporate daigou/reseller channel because of Victoria’s Stage 4 lockdown.
  • The Company, however, is witnessing robust growth in China IMF brand health metrics and improvement in other businesses’ performance.
  • For FY2021, the Group revenue is anticipated in the range NZ$1.80 billion-NZ$1.90 billion.

The Auckland-headquartered dairy nutritional company, The a2 Milk Company Limited (ASX:A2M) reported a significant drop of 11.422% at the end of the session, post the release of FY2021 outlook. A2M share price settled at A$15.200. The Company has a market cap of 12.74 billion and has 742.59 million outstanding shares.

In the announcement released today, 28 September, A2M highlighted that in FY2021, uncertainty continues as a result of COVID-19 and the possibility for the moderation of economic activity. The Company feels that it could have several impacts comprising the participants within the supply chain.

Earlier also, A2M advised on various challenges the Company was experiencing related to the infant nutrition business due to COVID-19 pandemic. These include:

  • The effect of pantry destocking progressing into FY2021 after the robust sales in the third quarter of FY2020.
  • Lower than expected sales to retail daigous in Australia, because of decreased tourism from China plus international student.

In September 2020, the Company started noting further disruption in the corporate daigou / reseller channel because of Victoria’s Stage 4 lockdown. Because of these challenges, the Company is experiencing a reduction in the daigou channel beyond its expectation.

The a2 Milk Company also pointed out that the disruption in the daigou channel is impacting the September sales and presently it is expected that the impact on sales would continue in the remaining part of 1H FY2021.

Daigou channel sales form a considerable percentage of infant formula sales in the ANZ business. Looking at the present situation, A2M feels that its ANZ revenue would be substantially below plan for 1H FY2020.

However, the Company has been witnessing strong growth in underlying China IMF brand health metrics with improvement in other business performance as well. Despite this, A2M feels it to be a single channel logistics problem as they see robust consumer demand in China. A2M considers it as a temporary blow to the daigou channel, presuming COVID-19 related issues become steady in the country.

The other parts of A2M’s business are performing strong, which includes the Company’s liquid milk businesses in Australia and the US. Further, A2M’s Mother & Baby Stores are doing exceptionally well and are expected to continue doing so in the future. Also, the Company is witnessing a favourable influence of its marketing investments in brand building and activation actions from Q4 FY2020.

FY2021 Revenue Outlook:

Despite the significant uncertainty and volatility in market conditions due to COVID-19, A2M expects to deliver on the FY2021 outlook.

  • In 1H FY2021, the Company expects its Group revenue to range from NZ$725 million to NZ$775 million.
  • For FY2021, the Group revenue is expected between NZ$1.80 billion to NZ$1.90 billion.
  • Group EBITDA margin for FY2021 would be likely to be in the order of 31%.

A Quick Look at the recent Investor Presentation:

On 09 September 2020, The a2 Milk Company Limited released its Investor Presentation, highlighting about the Company, FY2020 Results, Group strategic update and its outlook.

FY2020 Results:

  • FY2020 revenue improved by 33% to NZ$1.73 billion.
  • FY20 EBITDA margin stood at 31.7%.
  • Net profit after tax grew up by 34.1% to NZ$385.8 million.
  • FY2020 EPS increased by 34% to 52.39 cents.
  • FY2020 operating cash flow was NZ$427.4 million.
  • Closing cash balance stood at NZ$854.2 million.

A2M’s Key Strategic Priorities:

  • Increase sustainable growth from core products in core markets.
  • Expand portfolio in core markets.
  • Grow in other targeted markets.

The Company also talked about their integrated approach to building a sustainable future. It would use its operating cash flow in below areas.

  • Grow the core business in current markets:

A2M would invest in building its business in China. It would also evaluate involvement in IMF manufacturing, organic growth of its existing as well as new products or new retail channel.

  • Expand the boundaries:

By the expansion of boundaries, the Company has plans to look at adjacent new product types in current markets, geographical expansion of existing products in new markets and examine complimentary M&A to push more growth within core markets

  • Strengthen Balance Sheet:

A2M’s balance sheet has the potential to support business growth and risk management initiatives. The Company would maintain a conservative cash reserve to handle in an uncertain atmosphere.

INTERESTING READ: a2 Milk has one problem that most businesses don't mind having- Excess growing cash

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