Why the A2 Milk share price crashed 25% on Friday

A2 Milk share price crashes on FY21 revision

Before the market opened on Thursday, infant formula company a2 Milk (A2M) requested and was swiftly put in a trading halt.

The reason for the halt?

A2’s management said it had 'become aware of information which may require us to release an announcement to revise our previously issued guidance to the market.'

In September, the company downgraded its full-year (FY21) guidance, at the time saying it expected Group revenue to come in at between NZ$1.8-1.9 billion, while maintain an earnings (EBITDA) margin 'in the order of' 31%.

That guidance assumed a strong acceleration in revenue during H2 of FY21 – a fact the company was well aware of during its Annual General Meeting.

At that meeting, held in November, the company reiterated that revised guidance, though at the time said that 'naturally there is uncertainty to this forecast.'

'We also acknowledge the outlook provides for a significant increase in revenue in the second half, depended on a number of key assumptions, including an improvement in the daigou channel and continued growth in our China label business.'

A2M finally released a trading update titled Updated 1H21 and FY21 guidance, on Friday afternoon. This contained what many were expecting: A significant full-year revenue and earnings margin downgrade.

Investors responded to this news swiftly and with little hesitation to sell the stock down. Indeed, by 1:24PM A2M was down 25.15% to $9.94 per share.

Looking at the exact figures behind this downgrade, across the first-half of FY21, the company said it now expected revenues of $670 million, while stressing that second quarter FY21 revenues will be higher. H1 earnings (EBITDA) margins are expected in the order of 27%.

Looking then to the full-year, management said it now expected to report total revenues of between $1.40-1.50 billion, while also providing a FY21 earnings (EBITDA) margin range of between 26-29%.

This comes after disruptions in A2’s corporate daigou/ reseller channels has persisted longer than the company expected, noting that while daigou channel performance had improved somewhat in Q2, 'with infant nutrition sales through this channel expected to be higher in the second quarter than the first quarter, the acceleration of the recovery in recent weeks has been slower than we had previously expected.'

Though these disruptions have mainly impacted infant nutrition sales, worryingly, it was noted that 'sales in our other nutritionals segment have now also been impacted.’

Despite today’s significant revenue downgrade, management said the performance of its Mother & Baby Stores (MBS) has remained strong, with the company flagging that it expected revenue growth of 40% on a year-over-year basis.

Looking further out, management also said: 'Notwithstanding the current headwinds, the Board considers the strength of the brand and the fundamentals of the business over the medium term remain sound.'

How long will UBS remain bullish?

In a note released to clients prior to today's FY21 guidance update, analysts from UBS correctly predicted that A2M’s Trading Update would be related to a 'slower-than-expected recovery in infant formula (IF) sales.'

Despite that correct prediction, prior to the company’s trading update, the investment bank said 'We continue to believe the majority of this demand should return over time as COVID-19 related disruptions moderate.’

In step with such a view, UBS reiterated their Buy rating and lofty NZ$20.50 price target on A2M, while saying:

‘Our Buy rating looks through the short-term earnings volatility into likely long-term prospects of substantial China IF market share gains through MBS store rollout and expansion of free trade zones in China and associated CBEC activity.’

It will be interesting to see if/ to what degree UBS analysts alter their rating and price target on a2 Milk in the days ahead given the magnitude of today’s FY21 revisions.

How to trade A2M: long or short

What are your thoughts on today’s downgrade and market reaction? Whatever your view on A2M, you can use CFDs to trade indices, currencies and equities – both LONG or SHORT – with IG’s easy to use trading platform now.

For example, to buy (long) or sell (short) the A2M using CFDs, follow these easy steps:

• Create an IG Trading Account or log in to your existing account
• Enter ‘A2 Milk’ in the search bar and select it
• Choose your position size
• Click on ‘buy’ or ‘sell’ in the deal ticket
• Confirm the trade