Why A2 Milk’s Share Price Slumps 3.07% On Strong Results

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New Zealand based dairy and infant formula producer The A2 Milk Company Ltd [ASX:A2M] has seen its share price slump 2.91% this morning, shedding $0.46 to trade at $15.49.

A2M has made hefty gains since the beginning of the second half of the current financial year. In the four months to 30 April, the company was up approximately 53.5% from $10.40 at the beginning of 2019.

Related: find out whether A2 Milk is one of Aussie stock picker Sam Volkerings’s top 4 stock picks in 2019.

What’s caused A2 Milk’s share price to drop?

A2M released its presentation to the market this morning ahead of its appearance at the Macquarie Group Ltd [ASX:MQG] conference. While the contents of the presentation reiterate some of the results stated in their February H1FY19 report, this morning’s release has dampened investors’ outlook on end of financial year results.

For the first nine months of trading to 31 March 2019, A2M reported a group revenue of NZ$938 million, up 42% from the prior corresponding period. This is on the back of continued sales growth in nutritional products and liquid milk.

While revenue is ahead from last year’s final result of $922.7 million with still a full quarter to go, the company warned that the strong Q3 results are somewhat inflated due to volume phasing. In line with regulatory changes (likely in China, although they did not specify) A2M pulled forward orders, which will probably mean a softer result for Q4.

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Perhaps it was also the information not included that also spooked investors. While A2M gave updates and guidance on their ANZ, China and US markets, the company did not release an update for their UK market. The company also did not release any financial information pertaining to their partnerships with Synlait or Fonterra.

However, it is worth keeping in mind that in a market that constantly demands an upgrade with every results release, today’s reiteration has definitely disappointed investors.

What’s next for A2M?

Beyond the negative sentiment that came from today’s release, there are still plenty of positives for the company.

The company plans to capitalise on its rapid earnings growth by reinvesting into increased marketing activities. A2M intends to drive brand awareness in China and the US. Management also held firm with its EBITDA margin guidance. This is expected to be notably lower than the first half due to its increased investment in marketing activities, resulting in a full year EBITDA margin in the range 31% to 32%.

Regards,

Ryan Clarkson-Ledward,

For Money Morning

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About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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