ASX 200 jumps, A2 Milk sinks, Crown rises

The S&P/ASX 200 Index (ASX:XJO) jumped today. However, the A2 Milk Company Ltd (ASX:A2M) share price fell after another bad update.

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The S&P/ASX 200 Index (ASX: XJO) went up by 1.3% today, ending at 7,173 points.

Here are some of the highlights from the ASX:

A2 Milk Company Ltd (ASX: A2M)

The A2 Milk share price suffered today, it dropped by 13.1% after a trading update.

The infant formula business downgraded its revenue expectations again. A2 Milk said it’s now forecasting FY21 revenue will come between $1.2 billion to $1.25 billion.

A2 Milk said that the China infant nutrition market has been and continues to be challenging for international infant formula producers.

While the third quarter trading was broadly in line with management’s plan, the company said it’s clear that the actions taken to address challenges in the daigou and reseller channel, as well as cross border e-commerce (CBEC), will not result in sufficient improvement in pricing, sales and inventory levels to meet previous guidance based on April sales being well below plan.

The board asked management to do a review of inventory and the conclusion of that is inventory is higher than had been anticipated. The challenges that the company is seeing has been exacerbated by the excess inventory.

A2 Milk is going to take more aggressive actions to address excess inventory, which will impact FY21 revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) and potentially the first quarter of FY22.

The company will also increase marketing investment in the fourth quarter of FY21 and into FY22 to drive consumer demand.

A2 Milk’s leadership recognises that the Chinese market and channel structure is changing rapidly and has therefore commenced a comprehensive process to review its growth strategy and executional plans to respond to this new environment.

Due to these various impacts, the FY21 EBITDA margin is now expected to be in the order of 11% to 12%, excluding acquisition transaction costs.

The A2 Milk board is considering a potential share buy-back. Despite that, it was one of the worst performers in the ASX 200.

Crown Resorts Ltd (ASX: CWN)

The Crown Resorts share price went up 7.25% after announcing two takeover bids.

Firstly, Crown announced that Blackstone Group had increased its bid for the casino business by $0.50 per share from $11.85 to $12.35 per share. Other than the increase in the indicative offer price, the key terms of the revised offer are consistent with that has been previously announced.

Crown has also received a merger proposal from Star Entertainment Group Ltd (ASX: SGR). The proposal is that Star will exchange each Crown share for 2.68 Star shares. The merger proposal also contemplates a cash alternative of $12.50 per Crown share, subject to a cap of 25% of Crown’s total shares on issue, with any scale back to occur on a pro rata basis.

If the cash alternative is fully taken up, it would result in pro forma ownership of the merged entity of 59% of Crown shareholders and 41% of Star shareholders.

Star stated that it has estimated a merger with Crown would result in indicative cost synergies of between $150 million to $200 million per annum. There is also the potential to unlock “significant value” from a sale and leaseback of the merged entity’s property portfolio.

The Crown board has not yet formed a view about either of these proposals.

The Star share price also grew by 7.7% today. It was one of the best performers in the ASX 200.

Woolworths Group Ltd (ASX: WOW)

The Woolworths share price went up 2.75% after announcing it’s going to demerge its Endeavour Group business, which includes Dan Murphy’s, BWS and ALH.

Woolworths shareholders will receive one new Endeavour Group share for each Woolworths share they own.

The supermarket business will retain a 14.6% interest in Endeavour Group after the demerger. Bruce Mathieson Group, the joint venture partner, will also retain 14.6%.

Subject to board approval and trading conditions, $1.6 billion to $2 billion could be returned to shareholders.

Woolworths Chair Gordon Cairns said:

The Woolworths Group Board believes that a demerger of Endeavour Group will enhance shareholder value and it will create two leading ASX-listed companies. We believe both businesses, post demerger, have strong future prospects and will benefit from greater simplicity, focus and ongoing partnership.

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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 Australia owns shares of Woolworths Limited. 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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