Why the a2 Milk (ASX:A2M) share price is sinking lower again

The A2 Milk Company Ltd (ASX:A2M) share price is sinking lower again and is down almost 50% from its 52-week high…

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The A2 Milk Company Ltd (ASX: A2M) share price was out of form on Monday and tumbled lower again.

The infant formula and fresh milk company’s shares dropped 3% to $10.62.

This means the a2 Milk share price is now down almost 50% from its 52-week high of $20.05.

Why is the a2 Milk share price sinking lower?

Investors have been selling the company’s shares over the last few months after COVID-19 had a negative impact on its sales and profits.

After benefiting greatly from panic buying and pantry stocking at the height of the pandemic, demand for its infant formula has softened over the last couple of quarters.

But the greatest impact has come in the daigou channel. This is where Chinese tourists and students buy products and send them back to China at inflated prices.

With international travel coming to a standstill, daigou sales have fallen heavily and put a big dent in the company’s earnings. In fact, the extent of the decline was even greater than expected and led to a2 Milk having to downgrade its guidance recently.

The company is expecting to deliver revenue of NZ$670 million in the first half of FY 2021. This is a 7.5% to 13.5% reduction on its previous guidance range of NZ$725 million to NZ$775 million.

Whereas for the full year, management now expects revenue to be in the range of NZ$1.4 billion to NZ$1.55 billion. The mid point of this guidance range is down 18% to 22.3% from its previous guidance range of NZ$1.8 billion to NZ$1.9 billion.

The company has also lowered its margin expectations and is now forecasting an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 26% to 29% for FY 2021. This is down from 31% previously.

Based on the mid point of both guidance ranges, this represents EBITDA of NZ$405.6 million in FY 2021. This would be down a sizeable 26.2% from FY 2020’s EBITDA of $549.7 million.

What else is weighing on its shares?

Also weighing on its shares has been a recent broker note out of Ord Minnett.

According to the note, the broker has retained its lighten rating and lowered its price target on the company’s shares to $9.90.

It reduced its price target and lowering its earnings estimates to reflect the tough trading conditions it is facing.

One possible positive, though, is that the company is sitting on a sizeable cash balance. With its share price trading close to a 52-week low, the broker has suggested that capital management initiatives could be considered.

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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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