Why is the a2 Milk (A2M) share price sliding?

Posted: 27 October 2021 12:41 pm
News
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Shares in the trans-Tasman dairy company are down 53% over the last 12 months.

Shares in a2 Milk (ASX: A2M) were running hot just 2 weeks ago, but on Wednesday, the trans-Tasman dairy company’s stock had firmly reversed course. It was the top loser on the ASX, sliding as much as 10.8% at $6.11 at the time of writing.

What has hit the A2M stock price?

On 27 October, the specialty milk company rolled out an investor update and, on the face of it, the news seemed to be quite promising.

a2 Milk announced a licensing deal with chocolate maker Hershey’s to produce co-branded chocolate milk and have a crack at the $711 million US branded flavoured milk market. The move is part of a2’s revised strategy to nearly double annual revenue to NZD$2 billion over the next 5 years.

While this seems ambitious compared to FY21’s COVID-hit sales of NZD$1.2 billion, it is actually not a big improvement on the pre-COVID period, when the company delivered sales of NZD$1.73 billion in FY2020.

Investors were also focused on a2’s projected profitability. The company says it will target earnings before interest, tax, depreciation and amortisation (EBITDA) margins “in the teens” over the medium term due to expected weaker market conditions, investments and innovation. However, that doesn’t compare well to its pre-COVID EBITDA margin of 31.7%.

a2 Milk’s modest projections come just weeks after smaller rival Bubs Australia (ASX: BUB) posted a 96% jump in quarterly revenue after a surge in China sales through ​​the key "daigou" channel, prompting hopes of a strong rebound in trading for a2.

Changing market

a2 Milk, on the other hand, indicated that it was shifting away from the daigou trade – which traditionally involved students and tourists buying products from Australian stores and sending them back to China – for the world’s largest infant formula market.

“The China infant milk formula market has experienced unprecedented change over the past 12 months which has required us to adapt our growth strategy,” managing director and CEO David Bortolussi said in a statement to the ASX.

“We will innovate and expand our infant milk formula product portfolio to appeal to a broader set of consumers and to maximise our distribution potential.”

The industry suffered setbacks over the last year as COVID-19 border closures prevented tourists and students from shipping its premium products back to China. It resulted in a2 Milk reporting an 80% dive in full year profit in August, after cutting its forecasts multiple times over the past year.

The company is now aiming to gain more control over its Chinese label (CL) and English label (EL) distribution, and will also increase its investment in the a2 brand, digital markets and ecommerce. a2 says it will also expand its CL and EL IMF product portfolios, and enter adjacent product categories to drive growth.

Investors are keeping their fingers crossed in the hope that this would reverse the more than 50% decline in a2 Milk shares over the last 12 months.

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