World News – AU – Why A2 Milk’s share price fell 25% on Friday

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A2 Milk’s share price fell sharply after the company revised its fiscal year 21 revenue and earnings outlook.

Before the market opened on Thursday, the baby food company called a2 Milk (A2M) and was quickly brought to a trading freeze.

The management of A2 said it had become aware of information that may require an announcement to be made to revise our previously issued guidance to the marketplace. ‘

In September, the company downgraded its full year forecast (FY 21) and expected consolidated sales of between NZ $ 1 at the time. 8-1. 9 billion while maintaining a profit margin (EBITDA) on the order of 31%. .

This forecast assumed a strong acceleration in sales in the second half of fiscal year 21 – a fact that the company was aware of at its annual general meeting.

At that November meeting, the company reiterated these revised guidelines, but said at the time that “this forecast is of course uncertain. ‘

‘We also acknowledge that the outlook is for significant sales growth in the second half of the year, based on a number of key assumptions, including an improvement in the Daigou Channel and continued growth in our China Label business. ‘

A2M finally released a trading update called Updated 1H21 and FY21 Guidance on Friday afternoon. That included what many expected: A significant downgrade in sales and profit margins for the full year.

Investors reacted quickly and with little hesitation to this news to sell the stock. In fact, at 1:24 p.m., A2M had sunk by 25. 15% up to $ 9. 94 per share.

Looking at the exact numbers for this downgrade in the first half of FY21, the company now anticipated sales of $ 670 million and emphasized that sales will be higher in the second quarter of FY21. The profit margins for the first half of the year (EBITDA) are expected to be around 27%. .

Looking at the year as a whole, management now anticipated total sales of between USD 1. 40-1. 50 billion, while at the same time a profit margin for fiscal year 21 (EBITDA) between 26 and 29% is achieved.

This is due to the fact that the disruptions in A2’s Daigou / Reseller channels lasted longer than expected. The Daigou channel’s performance improved somewhat in the second quarter, with infant formula sales through this channel expected to be higher in the second quarter than it was in the first quarter, the acceleration of the recovery in recent weeks has been slower than we previously expected. ‘

While these disruptions primarily impacted infant formula sales, it was worryingly determined that sales in our other nutrition segment were now also impacted. ‘

Despite today’s significant drop in sales, management indicated that the performance of its mother & baby stores (MBS) continues to be strong. The company said it expects sales to grow 40% year over year.

Looking ahead, management also said, ‘Despite the current headwinds, the Board of Directors believes the brand strength and business fundamentals remain solid over the medium term. ‘

In a notice released prior to today’s update to FY21 guidelines for clients, UBS analysts correctly predicted that A2M’s trading update would be related to a slower-than-expected recovery in infant formula (IF) sales. ‘

Despite that accurate forecast, the investment bank said ahead of the company’s trading update, ‘We continue to believe that most of that demand should return over time as the disruptions associated with COVID-19 subside. ‘

In line with this view, UBS reiterated its Buy recommendation and high NZ $ 20. 50 target for A2M while saying:

« Our buy rating uses short-term earnings volatility to examine the likely long-term prospects for significant market share gains in China through the introduction of MBS branches and the expansion of the free trade zones in China and the associated CBEC activities. ‘

It will be interesting to see if / to what extent UBS analysts will change their rating and price target for a2 Milk in the coming days, given the extent of today’s revisions for fiscal year 21.

What do you think of today’s downgrade and market reaction? Regardless of your opinion on A2M, you can trade CFDs in indices, currencies and stocks – both LONG and SHORT – with IG’s easy-to-use trading platform.

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World News – AU – Why A2 Milk’s share price fell 25% on Friday
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