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HY21 result: A2 Milk (ASX:A2M) share price on watch, downgrades again

The A2 Milk Company Ltd (ASX: A2M) share price will be on watch today after reporting its FY21 half-year result and downgrading expectations again.

A2 Milk’s FY21 half-year result

The infant formula company reported that its total revenue was down 16% to $677.4 million, with EBITDA (EBITDA explained) being down 32.2% to $178.5 million. The EBITDA margin dropped to 26.4% – or 27% excluding Mataura Valley Milk acquisition costs.

A2 Milk said that there have been continuing challenges because of COVID-19 disruptions to the daigou reseller channel. This is also affecting A2 Milk’s cross-border e-commerce (CBEC) channel. It is taking steps to re-activate this channel.

The company’s gross profit margin decreased to 50.3%. This was mostly due to recognising a stock provision of $23.3 million, higher cost of selling goods in the Chinese label infant nutrition and adverse product mix shift with more liquid sales compared to infant formula sales.

It wasn’t all bad, though local English label infant formula sales are key to business performance.

Chinese label infant nutrition did very well, with revenue growth of 45.2% to $213.1 million. There was an increase in its market share to 2.4% with stronger same store sales and distribution rising to 22,000 Chinese mother and baby stores (MBS).

The company sad that CBEC a2 Platinum English and other label infant nutrition sales dropped 35.5% to $103.5 million. However, the market share increased to 22.3%, up from 21.7% at the end of FY20, though the market share was 19.5% in December.

Infant nutrition sales in ANZ declined 40.5% to $209.5 million.

Australian liquid milk saw 16.3% revenue growth, helped by higher levels of in-home consumption. The A2 Milk market share rose to 11.7% in this market.

USA revenue, which is currently focused on liquid milk, grew by 22.3% with stronger sales in key stores and distribution rising to 22,300 stores. There was an improvement in EBITDA too.

In Canada, the company has started selling liquid milk in Western Canada in July 2020 with subsequent distribution expansion.

A2 Milk Outlook

A2 Milk said, again, that the pace of the recovery in the daigou reseller channel and in CBEC has been slower than previously expected and now its revenue is expected to be at the lower end of its guidance range.

A lower EBITDA range is now also expected because of lower revenue and higher brand investment, including longer daigou support.

FY21 revenue is now expected to be around $1.4 billion, with the group EBITDA margin expected to be between 24% to 26%. This outlook assumes a “significant” improvement quarter on quarter into fourth quarter.

Summary thoughts

A2 Milk is clearly struggling. Coming in at the low end of its guidance, if there’s that improvement, is disappointing. The A2 Milk share price could come under pressure today if investors were hoping for better.

There is every chance that the recovery in the last quarter won’t be as strong as expected. However, there could be light at the end of the horizon with COVID-19 vaccines being rolled out. I also note there’s still strong demand from Chinese consumers with the strength of the growth in the China MBS stores. So, it doesn’t seem as though China is entirely turned off from A2 Milk products.

How long will a recovery take? A2 Milk shareholders may have to be patient, but I think the company is likely to eventually get there. It could be an opportunity for a brave, long-term focused investor, but I have my eyes on other ASX growth shares first.

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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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