Why the a2 Milk Company (ASX:A2M) share price is in a trading halt

The A2 Milk Company Ltd (ASX:A2M) share price was placed in a trading halt this morning as it looks closer at its FY 2021 guidance…

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The A2 Milk Company Ltd (ASX: A2M) share price won’t be going anywhere today after being placed in a trading halt before the market open.

Why is the a2 Milk Company share price in a trading halt?

This morning a2 Milk Company requested an immediate trading halt after it became aware of information that could have an impact on the guidance it provided in late September.

Management explained: “We have become aware of information which may require us to release an announcement to revise our previously issued guidance to the market. We are requesting a trading halt to provide us with additional time to properly consider the current information and to consider new information as it becomes available, and inform the market.”

No other details were provided in relation to what this “information” is.

What is a2 Milk Company’s current guidance?

In late September A2 Milk Company provided guidance for first half revenue in the region of NZ$725 million to NZ$775 million and full year revenue in the region of NZ$1.8 billion to NZ$1.9 billion.

This represents a 3.9% to 10.1% decline for the first half and then a 4% to 9.8% increase for the full year.

Management is also forecasting an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 31%. This would result in EBITDA of NZ$558 million to NZ$589 million for FY 2021, up 1.5% to 7.1% from NZ$549.7 million a year earlier.

Is a2 Milk Company going to downgrade its guidance?

At this stage it is unclear whether a2 Milk Company is going to be downgrading or upgrading its guidance.

However, the request for a trading halt is reasonably ominous and appears to be hinting at a downgrade.

Particularly given the unpredictable trading conditions the company has been facing due to pantry destocking and weakness in the daigou channel.

When giving its guidance in September, management commented: “This disruption in the daigou channel is impacting our September sales and it is currently anticipated that this will continue for the remainder of the first half of FY21. Sales in the daigou channel represent a significant proportion of infant formula sales in our Australia & New Zealand (ANZ) business and, as such, we now expect ANZ revenue to be materially below plan for the first half.”

An update is likely to be released to the market on Friday morning.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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