Why is the A2 Milk share price sinking 9% today?

Investors have been hitting the sell button in a panic on Monday…

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Key points

  • A2 Milk's shares are sinking following the release of its half year results
  • The infant formula company delivered strong growth thanks largely to its China business
  • Investors may have been betting on an even stronger result

The A2 Milk Company Ltd (ASX: A2M) share price is having a difficult time on Monday.

In morning trade, the infant formula company's shares are down 9% to $6.48.

Why is the A2 Milk share price sinking?

Investors have been hitting the sell button on Monday following the release of A2 Milk's half year results.

For the six months ended 31 December, the company reported an 18.6% increase in revenue to NZ$783.3 million and a 10.5% lift in EBITDA to NZ$107.8 million.

A key driver of A2 Milk's sales growth was its China label infant formula business, which delivered a 43.5% increase in sales. This helped offset largely flat English label sales and drove total infant formula sales growth of 18%.

On the bottom line, the company reported a 22% increase in net profit after tax to NZ$68.5 million. This was boosted by interest income of NZ$12.1 million, which appears to reflect A2 Milk's massive cash balance of approximately NZ$700 million and the benefits of rising interest rates.

Excluding this and finance costs, A2 Milk's earnings were up 10.5% year over year.

So, why are its shares under pressure?

Given that the A2 Milk share price was up strongly last week, it's possible that a lot of today's result (and perhaps even more) was already priced.

Furthermore, some investors may have been looking for a guidance upgrade today. However, management has provided guidance that is somewhat mixed compared to previous expectations.

It is now forecasting low double digit revenue growth in FY 2023, supported by growth in China label infant formula, ANZ liquid milk, and USA liquid milk sales. This is better than its previous guidance of "high single digit revenue growth in FY23."

However, it also now expects an EBITDA margin similar to FY 2022 levels of 13.6%. Whereas previously it was guiding to "a modest improvement in EBITDA margin."

Another potential disappointment is that its US infant formula sales are expected to be "immaterial" in FY 2023. It is possible that some investors were betting on its second half sales receiving a material boost from its US expansion.

Nevertheless, with the A2 Milk share price up 35% over the last six months, longer term shareholders won't be too disheartened by today's decline.

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 Scott Phillips.

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