The A2 Milk Company Limited

A2M Details

Disruption in the Daigou Channel: The A2 Milk Company Limited (ASX: A2M) is engaged in the sale of branded products made with milk from cows, containing only the A2 protein type. The market capitalisation of the company as on 18 December 2020, stood at ~$9.86 billion.

A2M Updated 1HFY21 & FY21 View: As per a recent announcement, the company has updated its H1FY21 and FY21 guidance. The impact of the disruption in the daigou channel has proved to be more than previously anticipated. The daigou channel forms an important part of the infant nutrition sales in A2M’s ANZ business. As per a previous update, the management expected moderation of the disruption in Q2FY21. However, the company observes that the speed of recovery has been slower than anticipated before. The CBEC channel, which is dependent on the daigou channel, had an impact on its performance too. The company is of the view that the recovery in the daigou and CBEC channels to be slow for the remainder of the year. The COVID-19 pandemic is also expected to impact the reseller channel due to reduced travel between Australia and China in FY21 and the limited possibility of the return of international students and tourists to Australia during the period.

The company anticipates that the internal sale forecasts for both the daigou and the CBEC channels will be materially lower for the remainder of FY21. However, the daigou channel is strategically important for the success of the business, and A2M will look to reactivate the channel in the second half of FY21. The Group now expects revenue for H1FY21 to be ~$670 million, with Q2FY21 to be higher than Q1FY21. A2M previously gave a guidance of $725 million to $775 million in revenues for H1FY21. EBITDA margin for H1FY21 is expected to be around 27%. FY21 revenue is expected to be in the range of $1.40 billion to $1.55 billion (previous guided range to be in the range of $1.80 billion to $1.9). EBITDA margins are now expected to be in the ambit of 26% to 29%, in the same period, down from the prior outlook of around 31% in FY21.

Notably, for FY20, the company’s revenues came in at $1.73 billion, up 32.8% year over year. EBITDA also improved by 32.9% to $549.7 million in FY20 as compared to pcp.

                                     
FY20 Key Financial Highlights (Source: Company Reports)

Decent Revenue from Mother & Baby Stores: The company is optimistic about its prospects in China label MBS and anticipates revenue growth of ~40% in H1FY21, from the previous corresponding period.  

Strong Underlying Metrics: Despite the business impact due to channel disruption, the company continues to maintain strong underlying brand health metrics in China. It believes that the marketing investment in activation and brand building has made a positive impact on the business.

Stock Update: A2M has been providing resilient performance despite the disruption in its daigou channel. We believe that the stock is well poised for the long-term growth, and further stability in its sales channels will impact the business positively, going forward. The stock of A2M gave a negative return of 38.13% in the past three months and a negative return of 27.47% in the past one month. On a technical analysis front, the stock of A2M has a support level of $8.135 and a resistance level of $13.387. Currently, the stock is trading at $10.140, down by 23.645% as on 18 December 2020. The company lowered its FY21 and H1FY21 guidance from previously announced estimates, which caused the share price decline.

A2M Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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