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A2 Milk (ASX:A2M) share price smashed: Time to sell or a buying opportunity?

It’s been another brutal day for shareholders of A2 Milk Company Ltd (ASX: A2M), with the a2 Milk share price down more than 17% to $8.63 at the time of writing. The last time shares traded around this level was roughly three years ago.

So was today’s drop in the a2 Milk share justified? Or has there been a market overreaction here?

My take

You can read all about a2 Milk’s half-year result here.

In general, I don’t think anything announced today was drastically different from what the market was expecting based on previously announced earnings guidance.

A2 Milk updated the market in December last year with revised 1H21 and FY21 guidance, which indicated that group revenue for H1 FY21 was anticipated to be around NZ$670 million with an EBITDA margin of around 27%. Group revenue for FY21 was expected to be between NZ$1.40 billion and NZ$1.55 billion.

Fast forward to today, a2 Milk announced total revenue for the first half of FY21 of NZ$677.4 million, and an EBITDA margin of 26.4%. Full-year revenue is expected to be at the lower end of the previous guidance range, however, at around NZ$1.4 billion.

That said, it’s worth noting the company’s outlook and guidance figures assume that the daigou channel will deliver a “significant improvement” in quarter-on-quarter growth from 3Q21 to 4Q21.

If this improvement fails to materialise, it could mean that another downgrade may be on the cards.

Where to from here?

The obvious catalyst that will see the gradual recovery of a2 Milk is, of course, the continued rollout of COVID-19 vaccines across the globe, which will lay the foundations for the company’s daigou channel to return to normal volumes.

Therefore, I believe the timeframe on a2 Milk’s recovery will more or less be leveraged to the broader economic rebound as we push through this vaccine-led recovery.

My own view is that financial markets may have gotten ahead of themselves slightly and factored in a full recovery that may be drawn out longer than originally anticipated.

Share prices for recovery stocks rocketed on the first announcement of a vaccine last year, but even under some optimistic assumptions, the whole Australian population would be vaccinated by October this year at best.

Without going down a rabbit hole there, I think the market is now factoring in a longer recovery than what was first anticipated.

If I held a2 Milk shares right now, I’d be holding, as I think there’s a strong underlying business there with a likely recovery on the horizon.

Are shares a buy at current levels? I think a small position wouldn’t be a bad idea, but a sensible question is if there are better places to put your money in the meantime that could offer a higher return during the same amount of time.

If you’re interested in reading about potential catalysts and roadblocks that may lie ahead for a2 Milk, check out these articles:

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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