ASX 200 finishes flat, A2 Milk shares drop 10%

The S&P/ASX 200 Index (ASX:XJO) finished down 0.2% today. The A2 Milk Company Ltd (ASX:A2M) share price fell 10% after giving an update for FY21.

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The S&P/ASX 200 Index (ASX: XJO) finished down 0.2% today, ending at 5,952 points.

Here the main highlights from the ASX today:

A2 Milk Company Ltd (ASX: A2M) share price suffers after FY21 update

The A2 Milk share price fell around 10% today after giving an outlook update for FY21.

In the update A2 Milk reminded investors that it gave an outlook statement for FY21 when it delivered its FY20 result.

COVID-19 is causing a lot of uncertainty and last month A2 Milk warned there could be the potential for a softening of economic activity and there could be other impacts on participants within the supply chain.

In-particular, A2 Milk warned that there was a risk a flow-on effect of pantry destocking continuing into FY21 following the strong sales uplift in the third quarter of FY20 and lower than anticipated sales to retail daigous in Australia, due to reduced tourism from China and international student numbers.

Well, now those issues appear to be hurting revenue expectations for the upcoming result. A2 Milk said there has been additional disruption to the corporate daigou (reseller channel), particularly because of the stage 4 lockdown in Victoria.

Ultimately, A2 Milk said that there has been a contraction in the daigou channel beyond its previous expectations and there hasn’t been the replenishment orders that would typically be expected by this point.

The disruption is expected for the rest of the first half of FY21. That’s not good news for the near-term A2 Milk share price. Daigou channel sales represent a large proportion of infant formula sales across both Australia and New Zealand.

However, A2 Milk also said that based on the continuing strong growth of its China business and the performance of the rest of the business, the company thinks it’s a single channel logistics issue with continuing strong underlying consumer demand in China.

A2 Milk also confirmed that all other areas of the business is strong, including the liquid milk businesses in Australia and the USA, with the China business also performing strongly.

The company boasted of strong market share and brand awareness in China. Management thinks this confirms the effectiveness of its marketing.

Once the daigou disruption is reduced, A2 Milk thinks the second half will be strong and deliver overall growth over FY21.

A2 Milk gave some numbers expectations for the upcoming results.

Group revenue for the first half of FY21 is expected to be between NZ$725 million to NZ$775 million. That means A2 Milk is expecting revenue to fall by 4% to 10%, down from last year’s NZ$806.7 million.

However, for the full 2021 financial year it’s expecting revenue to be between NZ$1.8 billion to NZ$1.9 billion. That would represent growth of between 4% to 10%, up from NZ$1.73 billion in FY20.

In FY21 the earnings before interest, tax, depreciation and amortisation (EBITDA) margin is expected to be “in the order” of 31%.

Synlait Milk Ltd (ASX: SM1)

The Synlait share price fell around 7% after giving its FY20 result to the market.

The dairy business reported that revenue rose 27% to $1.3 billion, with consumer-packaged infant formula sales up 15% and lactoferrin sales up 46%.

Synlait’s EBITDA increased by 13% to $171.4 million and net profit after tax (NPAT) declined by 9% to $75.2 million.

Graeme Milne, Chair of Synlait, said: “Synlait’s financial performance was resilient when viewed against the backdrop of COVID-19. The company remains solid and highly profitable with EBITDA growing strongly demonstrating the strength of our core infant and lactoferrin businesses.

“Our NPAT performance did reduce reflecting investments made in new facilities and acquisitions over the past two years to achieve our growth ambitions. We are however well positioned to grow earnings off our current asset base.”

In FY21 the company is expecting a similar, or slight improvement, on the FY20 net profit result with management expecting lower demand in the first half of FY21 because of higher stock levels in the supply chain.

Piedmont Lithium Ltd (ASX: PLL) share price soars

The lithium business announced a binding sales agreement with Tesla. It’s a five-year fixed-price binding agreement with an optional five-year extension.

The agreement represents around a third of Piedmont’s planned production of 160,000 tonnes per annum for the five-year term.

The Piedmont Lithium share price shot up 77% today. Since 11 September 2020 it has risen 189%.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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