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3 ways A2 Milk (ASX:A2M) is planning a share price recovery

A2M share price
Source: Company presentation

The A2 Milk Company Ltd (ASX: A2M) share price was sent 16% lower yesterday after the company reported its FY21 half-year result.

Investors didn’t like what they saw in the numbers and the guidance.

FY21 half-year report highlights

There were plenty of double digit declines.

Total revenue was down 16% to NZ$677.4 million and earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 32.2% to NZ$178.5 million. The net profit after tax (NPAT) fell by 35% to NZ$120 million.  

Management explained that challenges result from COVID-19 disruptions are still being felt in the daigou channel which is also affecting the cross-border e-commerce channel.

A2 Milk has said that it has responded to challenges by appropriately managing discretionary costs while continuing important capability investment in people, technology and infrastructure.

Revenue for FY21 is now expected to be in the order of NZ$1.4 billion and the EBITDA margin is expected to be between 24% to 26%. This outlook assumes actions taken to re-activate the daigou channel are successful and deliver significant improvement quarter on quarter.

How is A2 Milk going to rescue its profit and share price?

The A2 Milk share price has fallen by more than half since early July 2020, it has dropped by 56%.

A2 Milk outlined three areas where it sees profit growth can occur:

1: Re-activate the daigou channel

A2 Milk said that the daigou channel has been disrupted, particularly due to the prolonged stage 4 lockdown in Victoria, with a contraction being beyond its previous expectations. These events, combined with subdued online pricing and channel inventory unwinding, have resulted in daigou being slower to re-enter the market to promote the brand. While there was some improvement in the channel towards the end of the period, the recovery was not as strong as had previously been expected.

The company is continuing to focus on re-activating this channel and is confident that it remains an attractive and strategically important channel for distribution penetration and new user recruitment.

A2 Milk is aiming to re-activate the channel with three strategies. The first is rebalancing inventory levels and improving traceability through the channel. The second is providing temporary support to daigou. Finally, it’s working with corporate daigou to drive innovation in distribution.

The company said that given the role of this channel, including in new user recruitment in an increasingly competitive market, some continued pressure on consumer demand is expected.

Management may believe that this initiative is the most important one to save the A2 Milk share price and profit.

2: Local Chinese growth

Sales in A2 China label infant nutrition of $213.1 million was achieved, an increase of 45.2% on the prior corresponding period.

The company’s 12-month rolling market value share in Chinese mother and baby stores (MBS) was 2.4% at the end of December, increasing by 0.7 percentage points compared to the prior corresponding period. Distribution increased to 22,000 stores, up from 18,300 in the prior corresponding period.

A2 Milk said that this performance is pleasing given the strategic importance and size of the channel and the increasing competitive intensity. There will continue to be an opportunity to gain market share given the strong resonance the brand has with consumers, according to management.

3: Expand in other geographies

Daigou and Chinese sales are not the only way that A2 Milk can grow.

A2 Milk says that the USA is an important market, it continues to evaluate product and distribution opportunities to significantly increase the scale and profitability of the business. It grew USA revenue by 22.3% to $34.2 million. An improved EBITDA result was also delivered, with a significantly reduced loss of $11.6 million, representing an $18.4 million improvement on the prior corresponding period. Its distribution has grown to 22,300 stores, up 2,000 from June 2020.

Canada growth is also expected. In March it entered into an exclusive licensing agreement with Agrifoods International for the production, sales and marketing of liquid milk under the A2 Milk brand in the Canadian market. Products were first launched in July 2020, initially focusing on Western Canada with subsequent distribution expansion.

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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 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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