A2 Milk shares are rising in response to a potential takeover effort.
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The A2 Milk Company Ltd (ASX: A2M) share price is up more than 11%. The infant formula business is reportedly a potential target.
Which business is reportedly interested?
According to reporting by The Australian, the New Zealand-based infant nutrition business is a target of the global food giant Nestle.
Nestle is reportedly taking a close look at A2 Milk, though it’s thought that there won’t be any takeover attempt until after the ASX share has released its FY21 result.
What has happened to the A2 Milk share price recently?
The A2 Milk shares have been volatile over the longer-term and short-term.
It has been a very difficult year for investors over the last year, with the A2 Milk share price down by around two thirds. In six months it’s down 35%. Including today’s gain, the A2 Milk share price is still down 6%.
Throughout FY21, A2 Milk gave several trading updates that showed the business was steadily expecting lower and lower sales, and more disruption to profit.
The latest update
In mid-May, A2 Milk said that that the trading dynamics in the China infant nutrition market were continuing to be challenging for A2 Milk and many international competitors.
The company admitted that the actions it had taken to address the challenges in the daigou/reseller and cross-border e-commerce (CBEC) channels would not result in sufficient improvement on the third quarter of FY21 in pricing, sales and inventory levels.
A2 Milk went through a review of its inventory and that indicated that it had too much stock. The problems in its daigou and CBEC channels were being exacerbated by the excess inventory and difficulties with “visibility”.
It decided to take more aggressive actions to deal with the inventory. But this would result in Chinese mothers getting the freshest infant milk formula and benefit the company’s customers, distributors and partners.
A2 Milk also planned to increase its marketing to drive consumer demand.
The ASX share was expecting to deliver FY21 revenue of between $1.2 billion to $1.25 billion. The underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin is expected to be between 11% to 12%.
What’s the long-term outlook for A2 Milk?
A2 Milk said that despite these short-term setbacks, it’s still confident in the long-term opportunity that the infant nutrition market in China represents, and is determined to build on the strong position which the company has built within this market over the past five years.
According to Commsec, the A2 Milk share price is valued at 24x FY23’s estimated earnings.
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Motley Fool contributor Tristan Harrison 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 Bruce Jackson.