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Date : 26/08/2021

A2 Milk Shares Crashed on ASX Following Weak Outlook For FY22

The a2 Milk Company is a producer of milk containing just the A2 protein by using cows that naturally produce just the said protein. The a2 Milk brand was expanding very quickly across ANZ and parts of SouthEast Asia. Their entry into China proved to be very successful and A2M was growing at over 60% year-on-year.

In order to sell in China, A2M relied heavily on the Daigou channel and given that travel has been non-existent between the two countries and with no resumption not in sight, shares began to plunge in early December as soon as the company downgraded its outlook for the financial year once again. The stock has continued to fall in 2021 as things haven’t really gotten better for the Daihou channel.

Why did A2 Milk Shares Crash on the ASX today?

A2M shares dipped by close to 12% today as the firm announced another disappointing earnings result. It has been a very challenging year for A2 in FY21 impacted by unprecedented levels of uncertainty and volatility due to the prolonged impact of COVID-19 and a rapidly changing China infant nutrition market. Over the past year China market growth has reduced significantly from globally high rates to be flat, and cross-border trade has been disrupted significantly which has had a profound impact on the Company’s results. The key points in relation to A2 Milk’s full year results were as below:

  • Revenue down 30.3% to $1.21 billion
  • Earnings before interest tax depreciation and amortisation (EBITDA) down 77.6% to $123 million inclusive of $109 million in stock write-downs and $10 million in Mataura Valley Milk (MVM) acquisition costs
  • EBITDA to sales margin of 10.2% or 11.1% excluding MVM acquisition costs
  • Net profit after tax down 79.1% to $80.7 million (including discontinued operations)

There seems to be no light at the end of the tunnel just yet for A2 Milk. The company has suffered heavily without a fully operational Daigou channel due to the effects of the pandemic on travel. Furthermore, the market dynamics in China have shifted heavily. The infant milk formula market in China has declined during this time and the Chinese market has also witnessed a large number of domestic companies entering the market as competitors.

In response to the above two structural headwinds, A2 recognised the need to change its approach and mentioned that a comprehensive process to review its growth strategy is underway. The scope of this review includes the Company’s approach to driving infant nutrition growth in both China label and English label channels; its infant nutrition product portfolio and innovation strategy; adjacent growth opportunities; and its brand positioning to ensure continued resonance and distinctiveness amongst an evolving consumer base.

A2M shares closed at $6.05 a share and the operating environment looks shakier now than ever before for A2 Milk.

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