Why the a2 Milk (ASX:A2M) share price is crashing 20% to a multi-year low

The A2 Milk Company Ltd (ASX:A2M) share price crashed 20% lower this morning to a multi-year low. Here’s why investors are selling…

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The worst performer on the S&P/ASX 200 Index (ASX: XJO) on Thursday has been the A2 Milk Company Ltd (ASX: A2M) share price.

In morning trade the fresh milk and infant formula company’s shares dropped as much as 20% to a multi-year low of $8.33.

When its shares hit that level, it meant they were down a very disappointing 45% over the last 12 months.

Why is the A2 Milk share price sinking?

Investors have been heading to the exits in their droves on Thursday after a2 Milk released its half year results.

For the six months ended 31 December, the company posted a 16% decline in revenue to NZ$677.4 million and a 32.2% decline in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$178.5 million.

This was driven by weakness in the daigou and cross-border e-commerce (CBEC) channels. These channels have been significantly impacted due to disruption resulting primarily from COVID-19.

However, as poor as this might look on paper, it was actually in line with its downgraded guidance. Management was aiming for first half revenue of ~NZ$670 million and an EBITDA margin of ~27%. Excluding the impact of its acquisition of Mataura Valley Milk, a2 Milk’s EBITDA margin would have been in line at 27%.

In light of this, investors may be wondering why the a2 Milk share price is being hammered today. The reason for this is the company’s outlook.

Outlook

Despite only downgrading its FY 2021 guidance on 18 December, management has been forced to do it again today.

This has been driven by the company once again failing to correctly estimate the pace of recovery in the daigou and CBEC channels.

Management is now forecasting FY 2021 revenue of ~NZ$1.4 billion with an EBITDA margin of 24% to 26% (excluding acquisition costs).

This compares to its December guidance range of NZ$1.4 billion to NZ$1.55 billion with an EBITDA margin of 26% to 29%.

Though, it has warned that this guidance assumes that actions it is taking to reactivate the daigou channel deliver a significant improvement in quarter-on-quarter growth in the fourth quarter.

Judging by the a2 Milk share price performance today, it seems as though some investors are concerned that this guidance may also be downgraded in the future.

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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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