A2 Milk (ASX:A2M) share price drops amid reported second class action

A2 Milk shares are falling as there’s reportedly another class action on the cards.

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The A2 Milk Company Ltd (ASX: A2M) share price is currently down amid news of a second class action against the company.

Another class action?

The company announced to the ASX that it’s aware of media reporting about a potential class action against the company that is apparently being investigated by Shine Justice Ltd (ASX: SHJ).

However, A2 Milk said it’s not aware of any legal proceeding having been filed by Shine Lawyers.

The company noted again that it believes it has, at all times, complied with disclosure obligations, denies any liability and will vigorously defend against any proceedings. It said it will respond further if and when any legal action is launched.

What are the allegations by Shine Lawyers?

The class action by Shine alleges that between 19 August 2020 and 7 May 2021, A2 Milk engaged in “misleading and deceptive” conduct, breaching its continuous disclosure obligations, and failing to adequately disclose future trade plans.

Shine also alleges that by 19 August 2020, A2 Milk was, or ought to have been aware that the FY21 guidance, and subsequent announcements, did not adequately take into account a number of factors known to the company which ultimately impacted the company’s financial performance. This led to a 62% drop in the A2 Milk share price.

There were two factors that A2 Milk referred to.

First, the decline in reseller/daigou sales, which reportedly fell due to the impact of A2 Milk’s sales through its cross border e-commerce channel. Shine noted that this saw A2 Milk heavily market English-labelled infant products directly into the Chinese market with discounting that “effectively undercut” sales in the daigou/reseller channel.

Second, Shine also referred to the decline in the CBEC business due to the drop in the daigou/reseller sales. Shine said that daigou sales often help stimulate demand for direct orders.

Two class actions

This is the second class action that A2 Milk is facing.

The lawyer group Slater & Gordon Limited (ASX: SGH) has also launched a class action. This occurred earlier in October.

Shine’s class action alleges similar sorts of things that the Slater & Gordon one does.

Slater & Gordon said:

The proceeding alleges that by no later than 19 August 2020, A2 Milk was or ought to have been aware that the FY21 guidance and subsequent representations did not adequately take account of a number of factors which would impact the company’s financial performance.

What is the latest guidance from A2 Milk?

FY21 has finished, but guidance for FY22 can have an impact on the A2 Milk share price.

In its FY21 result, A2 Milk said that its revenue fell 30.3% to $1.21 billion and net profit after tax (NPAT) had dropped 79.1% to $80.7 million.

Whilst the company said it wasn’t going to provide specific guidance, it said that it’s confident in the underlying fundamentals of the business and that the growth opportunity in core markets remains “significant”. The company also said there are opportunities for product innovation, category expansion and new markets. It said the long-term outlook is positive.

However, it also said that there is continuing uncertainty and volatility in consumer markets due to COVID-19, and other rapidly changing market dynamics, particularly in China.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia 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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