Insights

I think it’s time to jump on the A2 Milk (ASX:A2M) share price

The A2 Milk Company Ltd (ASX:A2M) share price has fallen 10%. I think it’s time to jump onto the shares whilst they’re priced lower.
The post I think it’s time to jump on the A2 Milk (ASX:A2M) share price appeared first on Motley Fool Australia. –

A2M share price

The A2 Milk Company Ltd (ASX: A2M) share price has fallen around 10% in response to a trading update.

What was in the update?

In the update A2 Milk reminded investors that it gave an outlook statement for FY21 when it delivered its FY20 result.

COVID-19 is causing a lot of uncertainty and last month A2 Milk warned there could be the potential for a softening of economic activity and there could be other impacts on participants within the supply chain.

In-particular, A2 Milk warned that there was a risk a flow-on effect of pantry destocking continuing into FY21 following the strong sales uplift in the third quarter of FY20 and lower than anticipated sales to retail daigous in Australia, due to reduced tourism from China and international student numbers.

Well, now those issues appear to be hurting revenue expectations for the upcoming result. A2 Milk said there has been additional disruption to the corporate daigou (reseller channel), particularly because of the stage 4 lockdown in Victoria.

Ultimately, A2 Milk said that there has been a contraction in the daigou channel beyond its previous expectations and there hasn’t been the replenishment orders that would typically be expected by this point.

The disruption is expected for the rest of the first half of FY21. That’s not good news for the near-term A2 Milk share price. Daigou channel sales represent a large proportion of infant formula sales across both Australia and New Zealand.

However, A2 Milk also said that based on the continuing strong growth of its China business and the performance of the rest of the business, the company thinks it’s a single channel logistics issue with continuing strong underlying consumer demand in China.

A2 Milk also confirmed that all other areas of the business is strong, including the liquid milk businesses in Australia and the USA, with the China business also performing strongly.

The company boasted of strong market share and brand awareness in China. Management thinks this confirms the effectiveness of its marketing.

Once the daigou disruption is reduced, A2 Milk thinks the second half will be strong and deliver overall growth over FY21.

Actual guidance

A2 Milk gave some numbers expectations for the upcoming results.

Group revenue for the first half of FY21 is expected to be between NZ$725 million to NZ$775 million. That means A2 Milk is expecting revenue to fall by 4% to 10%, down from last year’s NZ$806.7 million.

However, for the full 2021 financial year it’s expecting revenue to be between NZ$1.8 billion to NZ$1.9 billion. That would represent growth of between 4% to 10%, up from NZ$1.73 billion in FY20.

In FY21 the earnings before interest, tax, depreciation and amortisation (EBITDA) margin is expected to be “in the order” of 31%.

Why I think the A2 Milk share price is a buy today

I think A2 Milk is one of the best businesses in the S&P/ASX 200 Index (ASX: XJO). Being able to buy A2 Milk at a price that’s 10% cheaper than last week is an attractive idea to me.

These types of short-term problems can prove to be good long-term opportunities. Is A2 Milk going to be fundamentally challenged forever by this? No, in my opinion.

Indeed, Melbourne is about to leave stage 4 restrictions and Australia’s overall COVID-19 position is steadily improving. Plus, A2 Milk is making up for it with stronger local sales in China.

The company is still expecting revenue growth over FY21 with a pretty stable EBITDA margin.

The A2 Milk share price has been hit hard today, but it still has very strong international growth credentials in Asia and the US. By March 2022 I think A2 Milk shares can bounce back strongly – which is pretty short-term in share market terms.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post I think it’s time to jump on the A2 Milk (ASX:A2M) share price appeared first on Motley Fool Australia.

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