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The A2 Milk Company Ltd (ASX: A2M) share price dropped around 5% yesterday in response to its annual general meeting (AGM) update.
What did A2 Milk say about the current operating conditions?
Regarding the Asia Pacific region, A2 Milk said that the first half of FY21 is challenging for the Australia and New Zealand segment with the daigou and reseller channel impacted by COVID-19 related issues. A2 Milk is expecting the current impact will moderate over the course of the year.
The company revealed that a new incentive program has been launched in the corporate daigou channel to re-energise the channel with early signs of improvement.
A2 Milk commented that its multi-channel approach is strategically important with each channel playing a role. Despite short term challenges, A2 Milk still thinks the daigou channel is a good way to reach consumers in China and build brand awareness which may stimulate demand across multiple sales channels.
The infant formula business said that there has been a strong performance in the financial year to date with mother and baby stores sales growth, through a combination of growth in sales and expanded store distribution.
The company revealed that in its most recent 11/11 online sales event, it achieved 24% volume growth of its English label product, which was consistent with its plan. It also saw strong brand and product rankings.
Finally, in regard to Asia Pacific, the company said it grew its fresh milk market share in Australia to 11.6% in October, up from 11.3% at June.
In North America the impact of COVID-19 has seen some consumers become more value conscious. So the company is shifting from broadcast advertising to ‘in-store activation, account specific pricing and promotional activity’ – these tactics are showing “promising” results. This change is delivering gross revenue growth, but net revenue will be flat compared to FY20, though earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to increase in FY21.
Management still believe that the USA is a very important market. It’s the largest global milk market, with a significant and growing premium segment. A2 Milk believes significant growth in brand awareness will create a platform for future product launches. It’s still aiming for US$100 million of annualised sales.
The company also reminded investors that it launched in Canada through a licensing agreement with Agrifoods in July FY21.
Outlook and FY21 guidance
The ASX 200 business is maintaining its guidance for the FY21 half year and full year results. It’s still expecting total revenue for the first half of FY21 to be between NZ$725 million to NZ$775 million. FY21 total revenue is expected to be between NZ$1.8 billion to NZ$1.9 billion. The FY21 EBITDA margin is expected to be in the order of 31%.
A2 Milk said that due to the volatility arising from COVID-19 and the difficulties this presents with forecasting, naturally there is uncertainty to this forecast.
The business said that this outlook includes a significant increase in revenue in the second half, which is dependent on a number of key assumptions, including an improvement in the daigou channel and continued growth of the China label business.
But A2 Milk commented that it has observed strong underlying brand health metrics, in particular in China, including market share expansion, and growth of brand awareness and loyalty measures. A2 Milk said that this gives management confidence that, notwithstanding the current headwinds, the fundamentals of the business over the medium term remain sound.
Is the A2 Milk share price a buy?
The Motley Fool Share Advisor service rate the A2 Milk share price as a buy. The SA service likes the growing geographical footprint and capital light business model that A2 Milk offers investors, saying that it still has a strong future ahead of it.
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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 and has recommended 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.