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Date : 23/02/2022

Is A2 Milk Company Ltd (ASX: A2M) a buy at the moment?

A2 Milk Company Ltd (ASX: A2M) is a leading premium brand in the dairy milk industry that sells a particular type of cow milk that contains a protein called A2. It also sells milk and associated items, such as baby formula. A2M publicly trades and is NZX and ASX 50 public listed Company. The Company was founded in 2000 by Corran McLachlan. A2 Milk Company Ltd (ASX: A2M) headquarters at Auckland, New Zealand.

A2M currently trades at NZ$5.71, losing more than 3% from Monday’s close. The stock closed on Monday at NZ$5.68. The current market cap of the Company is around 4.26 NZD. The average trading volume was around 3.71 million shares. The Company’s stock is moving due to its results announcement of the first half of 2022.

A2M: 1H22 Key Financials

On February 21, 2022, the Company announced in a press release its financial results for the first half of 2022. The critical points of the detailed report are as follows:

A2 Milk Company Limited ASX

  1. A2 Milk Company revenue in the first half of 2022 was down 2.5% compared with revenue in the first half of 2021. The 1H22 revenue is NZ$660.5, while the 1H21 revenue was NZ$677.4. Net sales fell due to a decreased birth rate and quickly changing market dynamics in China, as well as steps are taken in 1H22 to continue rebalancing channel inventories for China label IMF and decreased advertising and promotion in English label IMF balanced by the addition of MVM revenue.
  2. The Company’s gross margin was around 46.2% showing that its business is booming. The introduction of MVM, disadvantageous product mix, and rising freight and raw milk prices all played a role in driving up the 1H22 Gross Margin percent.
  3. Net profit after tax fell by 53.3% on a comparable basis to NZ$56.1 million.
  4. As of the first half of 2022, the Company had cash and cash equivalents of NZ$747.2 million.

A2M Operational Highlights

  1. The most significant development in its business was the purchase of MVM. It was finalised in collaboration with the China Animal Husbandry Group. The insourcing of a2MC product also began.
  2. Sales of the China label IMF were down due to inventory rebalancing, but consumer demand was strong, and the market share increased to a new high.
  3. Sales of English label IMF are down, but sales in the ANZ reseller channel are improving.
  4. ANZ liquid milk sales are increasing, and the Company’s market share has reached a new high.
  5. Liquid milk sales in the United States have decreased due to the loss of a club client.

A2M MD and CEO’s comments on the 1H22 results

David Bortolussi, CEO and MD, said that despite the challenging market circumstances in China and the volatility of the COVID-19 index, the Company is stabilising well. Implementation of our plan to take advantage of a quickly changing China market has begun, and we have had significant success on several projects so far.

For the foreseeable future, we remain optimistic about China’s newborn milk formula market, and we are seeing strong consumer demand and share gain as we expand our China label business both in-store and online. He further added that they are witnessing gains in English label channel inventory levels, market price, and product freshness thanks to last year’s inventory reduction measures.

A2M 2022 Outlook

The Company now expects its sales to expand faster in FY22. A rise in sales is predicted in FY22, but the Company’s investment in expansion is likely to lead to lower profitability. For 2H22, revenues are predicted to be greater than 2H21 (including MVM), although growth is now forecasted in 1H22 and for fiscal year 22 ahead of earlier projections owing mainly to an increase in Chinese and English labels. COVID-19 consequences on the supply chain have intensified and are a critical risk in 2H22, and other industries and company concerns have already been revealed, despite some trading gain and loss possibilities.

Conclusion

A2 Milk shares remain impacted by the rapidly changing Chinese IMF market. But the business looks to be back on track in terms of sales and inventory. If it can continue this momentum going forward, A2M shares could once again be worth considering.

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