A2 Milk share price: What’s the outlook following new downgrade?

The a2 Milk share price (ticker: A2M) crashed over 10% on Monday, finishing out the session at $6.10, after the company issued yet another earnings downgrade.

This marks the fourth downgrade in recent memory, and has seen the infant formula company trade well off its 52-week high of $20.05 per share.

The stock opened down again on Tuesday, at $5.82, as brokers released downgrades the stock.

Another Day, Another Downgrade

As a consequence of still challenging Chinese infant formula market conditions, management provided yet another downgrade to full-year revenue and earnings.

Despite taking measures to offset the issues within the Chinese market, the turnaround that the company was betting on has yet to materialise, with it being noted that there has not been a ‘sufficient improvement on 3Q21 in pricing, sales and inventory levels to meet our previous guidance.'

Much of this has been driven by higher than expected inventory levels. To rectify this, over the coming quarter and potentially into the first quarter of FY22, management noted that they would be 'reducing sell-in to the daigou/reseller and CBEC channels.' This will result in a $80-90 million inventory write-down, in addition to the $23 million write-down booked in the first-half of FY21.

This inventory refresh will form an important part of maintaining the strength of A2’s brand as well as its medium-term business outlook, with the company aiming to soon rollout a wholesale price increase across its English label infant formula.

As a result of all this, A2 now expects FY21 revenue of between $1.2-1.25 billion and earnings (EBITDA) margins of between 11-12%. Previous expectations were for full-year revenue of $1.4 billion and EBITDA margins of between 24%-26%, though even that was a step-down on prior guidance.

Looking ahead, management also noted that it would bump up marketing spend in the fourth quarter of FY21 and into FY22 as a means of stimulating consumer demand. The company further said it was potentially considering launching a share buyback program, with more details to be provided at the full-year.

Analysts Views

Below we look at how a number of analysts reacted to A2M’s latest downgrade.

Citi

‘We retain our Sell recommendation as we see downside risk to medium-to-long term margins given a2 appears likely to increase its focus on the China offline channel, where it will need to increase investment in order to attempt to compete against larger domestic and foreign players.’

The investment bank has a $5.85 price target on A2M.

Macquarie

‘What started as an isolated daigou issue has now grown to affecting all channels and rising competition compounds this (and impacts recovery prospects). Earnings are yet to find a base.’

The investment bank has a Underperform rating and $6.10 price target on A2M.

UBS

The bull among the bears, UBS analysts reiterated their Buy rating in the wake of the downgrade, saying:

‘Our Buy rating is underpinned by our expectation of a meaningful recovery in daigou infant formula (IF) sales in the next 3 years, plus substantial medium-term China IF share gains through its offline rollout and free trade zone expansion driving CBEC activity.’

The investment bank has a NZD$13.50 price target on A2M.

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