A2 Milk Share Price Down More than 60% for the Year (ASX:A2M)

At the time of writing, the A2 Milk Company Ltd [ASX:A2M] share price is down a further 3.22%, trading at $6.92.

Today is a continuation of a savage year of trading for A2M shares, and I’ve marked up the chart below:

ASX A2M - A2 Milk Share Price ChartSource: Tradingview.com

We look at the latest A2M financial results, take a quick look at the chart, and a possible outlook for A2M shares.

Bad press is actually still bad press, lowlights from A2M results

Here’s the coverage from a recent Morgans post:

E-commerce platform pricing in China doesn’t appear to be materially improving and in Australia we have noticed that the retailers and pharmacies are discounting stock to clear aging inventory. A2M is not alone as many brands in the category are being discounted.

We have also noticed that A2M’s other nutritional sales which are more suited to the Chinese consumer (pregnancy, Manuka and Smart Nutrition products) are being discounted. This comes at a time when A2M was purposely tightening its inventory levels to drive scarcity and increase pricing.

A2M needs pricing to rise so that reseller margins improve and therefore demand for its products increase. Our industry feedback suggests that there has been no real improvement in the underlying operating environment.

A2M’s manufacturer, Synlait, recently said that visibility on A2M’s outlook and the extent of its recovery remains low over 2H21 and FY22.

Furthermore, we believe that there are structural changes being increased competition from Chinese companies such as Feihe and Junlebao which are winning market share (government has a 60% self-sufficiency target) and there is a declining birth rate in China (down 15% in 2020).

COGS pressures given rising dairy and vegetable oil prices are also a risk. FX remains a headwind.

There’s certainly a lot of negatives to unpack in this Morgans post.

They wound up downgrading earnings forecasts:

We have reduced our FY21/22/23 NPAT forecasts by 7.1%/5.2%/4.4% respectively. Our new FY21 revenue and EBITDA forecasts of NZ$1.35bn and N$324.7m are now below implied guidance for revenue of NZ$1.4bn and EBITDA of NZ$336-364m (margin guidance was 24-26%).

We stress that forecasting A2M’s earnings is difficult given the lack of transparency in some of its channels. However, we do think that consensus estimates look far too high across the forecast period.

No doubt the diplomatic angle on the China/Australia relationship is also a factor.

Perhaps more precisely, it could be competition from the likes of Mengniu Dairy and the growing consumer boycott mentality favouring domestic brands over foreign products — no matter how premium they are.

You just have to look at the various backtracking manoeuvres big fashion brands did recently after criticism from Chinese consumers, to see that that’s a factor.

On the charting side, A2M shares punched through the first level of support on the chart above, and it’s on the cusp of punching through the next level.

Outlook for the A2M share price

In my eyes, it’s negative.

Too many factors at play hurting this former growth darling, an ugly chart, and macro factors too.

At some point, the sheer size of this brand may see some bargain hunting creep in.

The company has a cash position of $776 million, against a current market cap of more than $5 billion.

That should help it find support at some point if the decline continues.

The next support level on the chart is hard to spot, such was its monumental rise.

Maybe $5? That would give it a market cap of around $3.7 billion.

Clouded is the word that springs to mind now for A2M.

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Lachlann Tierney,
For The Rum Rebellion

Lachlann Tierney is a writer for The Rum Rebellion and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. 

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