The A2 Milk Company Ltd (ASX: A2M) share price has continued its slide on Tuesday.
In afternoon trade, the infant formula company's shares are down 3.5% to $6.26.
This means that A2 Milk's shares are now down 12% over the last two trading days.
Why is the A2 Milk share price being sold off?
Investors have been hitting the sell button this week in response to the company's half-year results release.
In case you missed it, for the six months ended 31 December, A2 Milk reported an 18.6% increase in revenue to NZ$783.3 million and a 22.1% jump in net profit after tax to NZ$68.5 million. The latter was comfortably ahead of the consensus estimate of NZ$60.6 million.
So why the selling? This appears to have been driven by commentary around the China market and its margins in the ANZ segment.
Morgans has been looking at the result and has given its verdict. It commented:
While management believes that A2M is very well positioned over the medium term, it was quite cautious on the China IF industry for 2023. It said A2M is moving into an increasingly challenging period, with headwinds including the rolling impact of five consecutive years of a decline in the birth rate and the market wide transition of CL [Chinese label] IF product to the new GB standard.
We remain concerned that the transition to the new GB standard may cause disruption to sales/pricing and create inventory risks (write-downs) between the timing of new and old product (consumers perceive the stock as not being fresh). Given this uncertainty, A2M's share price may be more volatile over this period.
And while Morgans believes that A2 Milk can achieve its FY 2026 sales targets, it has doubts over its ability to deliver on its margin goals. The broker adds:
A2M remains on track to achieve its ambition to grow sales to US$2bn by FY26. Management said that CL is tracking ahead of its target while EL, other nutritionals and emerging markets are a work in progress. Given EL (higher margin vs CL) is lagging and the business requires further investment, achieving an EBITDA margin of low-to-mid 20s now looks a stretch. A margin in the high teens now looks more achievable in this timeframe.
Morgans has retained its hold rating with a slightly improved price target of $6.45.
