The A2 Milk Company Ltd (ASX: A2M) share price is currently up more than 2% after last week’s selloff.
What is happening?
A2 Milk shares are currently in the green after the savage selloff at the end of last week when the company released a disappointing trading update.
The A2 Milk share price plunged 24% on Friday, so there’s still a long way to go before the company is back to where it was.
The company said that the effects of the disruption in the daigou channel, which represents a significant proportion of infant nutrition sales of A2 Milk’s domestic business, has proved to be more significant and protracted than was previously anticipated.
Whilst the daigou disruption has mostly hurt infant nutrition sales, the sales in other nutritional segments have now also been impacted.
A2 Milk was hoping and expecting a lessening of the disruption to this channel in the FY21 second quarter. There has been an improvement, and the second quarter is expected to be better than the first quarter, but the recovery has been slower than first expected.
The impact of the daigou disruption is also hurting the CBEC (cross border e-commerce channel) sales. The daigou channel plays an important role in stimulating demand across multiple sales channels, including CBEC. The company said that it did well in the competitive 11/11 online sales event, and showed year on year growth, but CBEC sales after that have been below expectations.
There was one piece of good news about Chinese consumer sales – mother and baby store (MBS) revenue is expected to be 40% above the prior corresponding period. Its market share was 2.3% as at the end of October, with increases in both same store sales and the number of new stores in the first half.
The liquid milk businesses in Australia and the USA have also performed well.
Group revenue is now expected to be in the order of NZ$670 million and the EBITDA margin (EBITDA explained) is projected to be in the order of 27%.
The full year revenue is expected to be between NZ$1.4 billion to NZ$1.55 billion with the EBITDA margin expected to be between 26% to 29%.
Over the medium term, the company expects the EBITDA margin will be in the order of 30%.
The A2 Milk share price and earnings are unpredictable in the short term, just like any business. It turns out that A2 Milk shares were a bit of a trap, for the short term at least. There could be a recovery in 2021 if daigou sales return, particularly if borders start opening up again with the introduction of COVID-19 vaccines.
The sales disruption has been stronger than expected, with A2 Milk confirming its guidance to the market just a month ago at the AGM. There’s a chance things could get even worse. But I do think A2 Milk has a strong brand that could see a return to growth if it can win back demand. A2 Milk could be worth a high-risk investment if you think that it will recover volume demand over the next 12 to 18 months.