Wed. Dec 1st, 2021

Scared, big-eyed man in pink t-shirt with hands covering his mouth

Image Source: Getty Images

That A2 Milk Company Ltd (ASX: A2M) The share price came under significant pressure on Wednesday morning.

At the time of writing, the shares of the controlled infant formula company have fallen 12% to $ 6.03.

Why is the A2 Milk share falling?

Investors have sold the A2 Milk share price down today after the release of their much awaited investor update.

This update revealed management’s new strategy, which is focused on rebuilding the company into an exciting, innovative and sustainable growth company. This strategy is largely focused on capturing the full potential of the Chinese IMF market and increasing product innovation.

However, any hope that these plans would bring A2 Milk back to previous levels of explosive earnings growth appears to have been rejected by management.

Growth targets

The update reveals that A2 Milk has set itself a medium-term goal (≥ 5 years) to increase its sales to NZ $ 2 billion.

While this is a large increase in FY 2021’s COVID-affected sales of NZ $ 1.2 billion, it is only a modest increase in FY 2020’s pre-COVID sales of NZ $ 1.73 billion. This shows how much has changed in the main Chinese market over the last 12 months.

In addition, the prospect that the company’s EBITDA margin will soon return to FY 2020’s level of 31.7% is also ruled out. Management stated that it is targeting EBITDA margins “likely” in teenagers in the medium term due to expected market conditions, investment and innovation.

It is also worth noting that there are a number of uncertainties that may still affect these targets. This includes the pace of recovery in cross-border trade after COVID-19, how the competitive landscape will develop in China, and the extent and pace of changes in consumer product and channel preferences. The latter relates to the growing preference of Chinese consumers for domestic brands over international brands.

As a result, management warned that “due to these uncertainties and the range of potential outcomes, it is very difficult to define future government targets and when they will be achieved – the path is also unlikely to be linear.”

And if there is one thing that the market hates, it is uncertainty. Which to some extent explains why the A2 Milk stock is deep in the red today.

It is also likely that it will weigh on its shares, are comments on its prospects. Although its overall outlook remains the same for FY 2022, there has been a shift in the mix of sales. As a result, sales of the IMF’s Chinese brands are now expected to decline significantly in the first half of the year compared to the previous corresponding period.

Leave a Reply

Your email address will not be published. Required fields are marked *