Could the A2 Milk Company Ltd (ASX: A2M) share price be a big opportunity right now?
What happened to the A2 Milk share price?
It’s down by 17% over the last month and it’s down 44% over the past six months. When a quality business like A2 Milk falls that hard you’d think it’d be an easy decision to buy shares. But share prices only drop as much as this when it seems like there’s no quick solution. Maybe that’s when it’s the time to buy?
This decline happened after the company updated its sales guidance.
New HY21 and FY21 guidance
Management had expected a moderation of the disruption to its Australia and New Zealand infant nutrition business. But it has been more significant and protracted than previously anticipated. Sales in other nutritional segments have also been impacted.
The disruption in the daigou channel is also having a significant impact on the cross border e-commerce channel. The daigou channel is important for stimulating demand across multiple channels. Sales in the CBEC channel was below expectations after the 11/11 online sales event.
Group revenue in the first half of FY21 is now expected to be in the order of $670 million, with the second quarter being better than the first quarter. The overall HY21 EBITDA margin (EBITDA explained) is expected to be in the order of 27%.
Overall revenue for FY21 is now expected to be in the range of $1.4 billion to $1.55 billion with the EBITDA margin being between 26% to 29%. Over the medium term, A2 Milk is still expecting to have an EBITDA margin of around 30%.
Acquisition
A2 Milk recently announced it’s following through with its plan to buy a 75% interest in Mataura Valley Milk (MVM), which is a dairy nutrition business in Southland, New Zealand.
A2 Milk is attracted to the recently commissioned facility owned by MVM. The proposed acquisition will allow A2 Milk to manufacture products itself, provide supplier and geographic diversification, as well as strengthening relationships with key partners in Australia.
The 75% stake is going to cost A2 Milk NZ$268.5 million on a debt-free and cash-free basis. It’ll be funded from A2 Milk’s existing cash reserves.
The deal will allow A2 Milk to capture the manufacturing margin, diversify its manufacturing sources and potentially increase its product diversification.
Is is time to buy A2 Milk shares?
In an A2 Milk article just over a month ago I warned: “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.”
The main problem is: when will demand return to normal? Is this just a period of disruption during COVID-19? – Could demand return as early as 2021?
Will demand ever return from Chinese consumers? If it doesn’t return then the A2 Milk share price could remain lower for a lot longer than shareholders are hoping. But there are other areas where the company can grow not just China – North America looks very promising, both the USA and Canada. A2 Milk still has a high quality brand with a strong balance sheet.
If you believe that some of the Chinese demand will return sooner rather than later (/never) then A2 Milk shares could be a good opportunity with a 2-year horizon. According to CommSec projections, it’s priced at 24 times the estimated earnings for the 2022 financial year.
There are other ASX growth shares I’d rather buy first with a higher chance of continuing growth such as Pushpay Holdings Ltd (ASX: PPH) and Magellan Financial Group Ltd (ASX: MFG) which I wrote about here.
