A2 Milk (ASX:A2M) share price crashes 12% on investor update

A2 Milk shares are being hammered on Wednesday…

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The A2 Milk Company Ltd (ASX: A2M) share price has come under significant pressure on Wednesday morning.

At the time of writing, the embattled infant formula company’s shares are down 12% to $6.03.

Why is the A2 Milk share price falling?

Investors have been selling down the A2 Milk share price today following the release of its highly anticipated investor update.

That update revealed management’s new strategy which is focused on rebuilding the company into an exciting, innovative and sustainable growth company. This strategy is largely focused on capturing the full potential of the China IMF market and ramping up product innovation.

However, any hopes that these plans would return A2 Milk to previous levels of explosive earnings growth appear to have been dismissed by management.

Growth targets

The update reveals that A2 Milk has set itself a medium term (≥ 5 years) target of growing its sales to NZ$2 billion.

While this is a big increase on FY 2021’s COVID-impacted sales of NZ$1.2 billion, it is only a modest increase on FY 2020’s pre-COVID sales of NZ$1.73 billion. This demonstrates just how much has changed in the key China market over the last 12 months.

In addition, the prospect of the company’s EBITDA margin returning to FY 2020’s level of 31.7% any time soon has also been ruled out. Management advised that it is targeting EBITDA margins “probably” in the teens in the medium term due to expected market conditions, investment, and innovation.

It is also worth noting that there are a number of uncertainties that could still impact these targets. This includes the pace of recovery in cross-border trade post COVID-19, how the competitive landscape will evolve in China, and the extent and pace of change in consumer product and channel preferences. The latter relates to Chinese consumers’ growing preference for domestic brands over international brands.

As a result, management warned that “because of these uncertainties and the range of potential outcomes, it is very difficult to define future state targets and when they will be achieved – the path is also unlikely to be linear.”

And if there’s one thing that market hates, it is uncertainty. Which goes some way to explaining why the A2 Milk share price is deep in the red today.

Also likely to be weighing on its shares is commentary on its outlook. While its overall outlook remains the same for FY 2022, there has been a shift in the mix of sales. As a result, China label IMF sales are now expected to be significantly down in the first half compared to the prior corresponding period.

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Motley Fool contributor James Mickleboro 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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