Could the A2 Milk Company Ltd (ASX: A2M) share price be a buy right now? It has fallen to a 52-week low of around $10.
What's going on?
The market continues to punish A2 Milk as it suffers with lower demand for its products.
It's experiencing issues relating to infant formula demand. In August there was the flow-on effect of pantry de-stocking continuing into FY21 after the strong sales lift in the third quarter of FY21 and lower than anticipated sales to retail daigous in Australia, primarily due to reduced tourism from China and international student numbers.
In September it said that it had started to see additional disruption to the corporate daigou and reseller channel, particularly because of the prolonged stage 4 lockdown in Victoria, with a contraction beyond its expectations.
A2 Milk told the market in December that the effect of the disruption in the daigou channel, which represents a significant proportion of infant nutrition sales in the ANZ business, has proved to be more significant and protracted than was previously anticipated. This is also impacting sales in other segments.
The company had been expecting a stronger recovery in the FY21 second quarter. The recovery has been slower than expected.
A2 Milk is also seeing an impact in the cross border e-commerce channel (CBEC) because of the daigou troubles. The ASX share says that the daigou channel plays an important role in stimulating demand across multiple sales channels, including CBEC.
As a result of all of the above, and the recovery not being as strong as expected, its internal sales forecasts for both the daigou and CBEC channels for the rest of FY21 reduced in December. Its intention is to focus on reactivating the daigou channel in the second half.
Any positives?
A2 Milk revealed that its China mother and baby stores (MBS) growth remains very strong and it expects revenue growth in the first half to be above 40%.
The rolling 12-month rolling market value share in MBS is continuing to rise, it's now at 2.3% at the end of October, with increases in both same store sales and the number of new stores in the first half.
A2 Milk also said that its liquid milk businesses in Australia and the USA have performed well through the first half, with both milk businesses posting "strong" growth compared to the first half of FY20.
Despite the problems with the daigou channel, A2 Milk said that it's seeing a positive trend in indicators in China like awareness and intention to purchase. A2 Milk continues to see a positive impact from the marketing investment in activation and brand building activities.
A2 Milk guidance
A2 Milk is expecting FY21 first half revenue to be around NZ$670 million, with FY21 annual revenue in the range of NZ$1.4 billion to NZ$1.55 billion. The FY21 earnings before interest, tax, depreciation and amortisation (EBITDA) margin is expected to be between 26% to 29%.
Is the A2 Milk share price a buy?
There are mixed views about A2 Milk.
Broker Citi thinks that A2 Milk shares are a sell because of continuing troubles in the daigou sector, stronger domestic brands and the uncertainty relating to market access. It has a share price target of $9.40 for the infant formula business.
However, Morgans has a buy rating at the moment with a share price target of $12.20. The broker acknowledged that trading was weaker than expected and it will be some time before investors are confident about the business again.
