Why are A2 Milk shares crashing 12% today?

A2 Milk shares are falling from grace on Monday. But why?

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A2 Milk Company Ltd (ASX: A2M) shares are on the move on Monday morning.

In early trade, the infant formula company's shares are down 12% to $4.35.

Why are A2 Milk shares crashing?

Investors have been selling A2 Milk shares this morning after the company released its full-year results for FY 2023.

As we covered here earlier, A2 Milk reported a 10.1% increase in revenue to NZ$1.59 billion and an 11.8% lift in earnings before interest, tax, depreciation, and amortisation (EBITDA) to NZ$219.3 million.

And thanks to its NZ$757.2 million cash balance and rising interest rates, A2 Milk's net interest income increased to NZ$21.6 million, which boosted its net profit after tax by 26.9% to NZ$155.6 million.

A2 Milk's strong growth was driven largely by its performance in the China & Other Asia segment. It reported a 37.9% increase year on year thanks to market share gains in the China infant milk formula (IMF) market. This took its market share to record levels in the lucrative market, which helped offset a sharp decline in ANZ sales caused by a change in distribution strategy.

Looking ahead, in FY 2024, management expects to achieve low single-digit revenue growth and an EBITDA margin broadly in line with FY 2023's margin of 13.8%.

How does this compare to expectations?

A2 Milk appears to have outperformed expectations in FY 2023. For example, Bell Potter was expecting sales of NZ$1,587.3 million, EBITDA of NZ$215.4 million, and adjusted net profit after tax of NZ$147.5 million.

However, its guidance for FY 2024 might have been a little on the light side. This could explain why A2 Milk shares are taking a beating this morning.

Bell Potter was forecasting revenue of NZ$1,671.9 million, representing growth of 5.15%, and an EBITDA margin of 14.5% in FY 2024. This compares to its guidance for low single digit revenue growth and a margin of ~13.8%.

What else?

Also potentially weighing on A2 Milk shares today is its commentary relating to the China market. It said:

The overall China IMF market declined 12.1% in volume and 14.4% in value in FY23. The decline in BCD cities exceeded Key&A cities particularly in the second half, with Key&A market value decreasing by 13.1% in 2H23 and BCD market value decreasing by 18.3% in 2H23. The market decline reflected the decrease in newborns overall, socio-demographic differences between Key&A and BCD cities, challenging macroeconomic conditions impacting retail sales, and increased competitive intensity and promotional activity driven by excess industry capacity and the commencement of the market-wide transition to new GB standards.

The number of newborns in China declined by 10.0% in CY22 to 9.6 million9 which is likely to decline further in CY23 having regard to various factors and data points, including socio-demographics, prevailing youth unemployment rates, recent marriage numbers and pregnancy indicators.

Given how important the China market is to A2 Milk, this could make the next few years tricky for the company.

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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