Could the A2 Milk Company Ltd (ASX: A2M) share price be a trap or an opportunity at the current level?
What has been going on?
A2 Milk shares have been on a downward trend over the past few months. It’s down 10% over the past month and down 33% over the past five months.
At the recent annual general meeting (AGM), A2 Milk said its guidance for FY21 first half revenue was between NZ$725 million to NZ$775 million, with FY21 total revenue guidance of between NZ$1.8 billion to NZ$1.9 billion. This means A2 Milk is expecting first half revenue to fall 4% to 10% and then rise 4% to 10% for the full year. The EBITDA margin is expected to be “in the order of 31%.”
The fact that it gave that guidance is a positive sign. Sometimes companies go through downgrade cycles.
A2 Milk has been telling investors for a while that COVID-19 is having some impacts on sales. We’ve known for some time that daigou make up a material portion of purchases locally. However, with international borders currently shut which is stopping international tourists and students coming, those local sales are suffering right now.
It’s the sales difficulties that are causing investors to fret that A2 Milk may not be cheap enough with all of the current issues. This is why the A2 Milk share price may be a trap – there is a chance of further bad news.
Why A2 Milk shares could be an opportunity
It’s important to consider whether an issue is going to affect things for the shorter term or whether it’s a permanent thing.
At this stage it seems like A2 Milk’s issues are a shorter term problem which may be partly resolved once COVID-19 is dealt with through a vaccine.
A2 Milk is also growing its China business strongly, which could make up for the lost local sales as it scales over the next year or two. The US and Canadian growth is also promising for the longer term. It would be useful to be able to diversify its customer base, rather than relying on just a Chinese base.
Looking at CommSec, A2 Milk shares are valued at 22 times the estimated earnings for the 2022 financial year. I think that looks very reasonable to me, if you look beyond FY21. Out of other ASX growth shares, one I really like is Pushpay Holdings Ltd (ASX: PPH) for its rising profit margins.
