The A2 Milk Company Ltd (ASX: A2M) shares continue to be some of the most traded on the ASX in recent weeks.
Yesterday, shares slumped an additional 5% to $5.46 – a new 52 week low. The last time shares traded at this level was back in 2017.
To put that another way, A2’s shares have tumbled more than 70% since reaching its highs in August last year.
Is there a potential investment case to be made for a potential value play?
A2M share price
Transitory vs structural
When trying to make a potential investment case for a2 milk, it’s worth trying to identify if the challenges the company is up against are transitory in nature or if they’re more structural, i.e., something has fundamentally changed that’s likely to be permanent.
A2 milk has grown to become a major wealth winner that has relied upon its daigou channel and the perception of its brand to drive sales growth over the past several years.
If you take away any of those two components.. things can evidently change quickly.
If I could be assured that the resumption of international travel would see the daigou channel return to its former glory, a2 milk’s shares would be an obvious buy in my eyes. For a company that was compounding its earnings year-on-year consistently, today’s valuation would likely represent good value.
As mentioned in my previous article, I think the issues are more structural than some may think. Due to the recent trend of Chinese consumers embracing domestic products, the perception of the brand might not be the same as it once was.
Given the majority of the company’s growth came from China, if demand doesn’t bounce back strongly, a2 milk just won’t have the growth story attached to it and its shares are likely to be priced accordingly.
So, its options would then be to expand further into new geographies or just operate its mature business in Australia and become a dividend-paying company. If it’s the latter, its valuation is probably still too high in my view with a forward Price/Earnings ratio of over 35.
With international travel still off the cards until at least mid-2022, I think there are opportunities elsewhere that aren’t facing such challenging conditions.
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