The A2 Milk Company Ltd (ASX: A2M) share price is coming under further pressure. It has fallen another 1% today.
What’s happening to the A2 Milk share price?
Since 2 March 2021, A2 Milk shares have steadily fallen from $9.54 to today’s $8.90 (at the time of writing.
Of course, the share price was at $10.45 just before the release of its FY21 half-year report.
The last month has seen negative news in relation to demand signs for A2 Milk.
For example, a week ago Synlait Milk Ltd (ASX: SM1) gave an update regarding its FY21 guidance. Synlait is a major supplier for A2 Milk. Plus, A2 Milk owns a large amount of Synlait shares.
In the update, Synlait said that there is ongoing uncertainty of A2 Milk’s expected demand for the rest of FY21 and FY22. Synlait also said that there continues to be global shipping delays which is expected for some time and could further impact FY21.
A2 Milk itself has said that it’s experiencing a lot of disruption.
The company said that FY21 half-year revenue was down 16% to $677.4 million but earnings before interest, tax, depreciation and amortisation (EBITDA) was down 32.2% to $178.5 million.
A2 Milk is suffering from challenges resulting from COVID-19 disruption experienced in the daigou and reseller channel with a flow on impact to the cross-border e-commerce (CBEC) channel.
There are some parts of the A2 Milk business that are still growing, such as its liquid milk business in North America and Australia, as well as local Chinese growth.
However, infant nutrition revenue in Australia and New Zealand fell 40.5% to $209.5 million for the half. This segment is suffering from pantry destocking after the strong sales in the third quarter of FY20, combined with reduced tourism from China and international student numbers as a consequence of COVID-19 travel restrictions.
But it’s the daigou channel sales that are particularly suffering, with the resellers being slower to re-enter the market. Whilst there was improvement in the channel, the recovery wasn’t as strong as the company had expected.
The A2 Milk share price has dropped 55% since the middle of July 2020.
How is A2 Milk going to turn things around?
One of the areas that A2 Milk continues to focus on is the China label channels, which is seeing high levels of growth. In the six months to 31 December 2020 it experienced 45.2% revenue growth to $213.1 million. The company said that its 12-month rolling market value share in Chinese mother and baby stores (MBS) increased to 2.4%, up by 0.7 percentage points from the prior corresponding period. The distribution also increased to 22,000 stores.
A2 Milk commented on this:
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.
Is it time to buy at this A2 Milk share price?
There’s an investment saying that profit downgrades comes in threes, so only time will tell whether A2 Milk downgrades its expectations further from here. At the moment the company is expecting FY21 revenue in the order of $1.4 billion and a group EBITDA margin for FY21 to be between 24% to 26%, excluding acquisition costs.
Some brokers are quite bearish on A2 Milk shares, such as Ord Minnett and Citi, which have share price targets of below $8. Indeed, Citi’s target is $7.15 with lower margins expected over time.
However, Morgans thinks the company can recover as these conditions improve. It has a price target of $10.40 for A2 Milk shares.
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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.