Why the A2 Milk Share Price Went Down Today: Lofty Expectations

At time of writing, the share price of A2 Milk Company Limited [ASX:A2M] is taking a big hit. It’s currently down 11.25%, trading at $14.20.

After some negative momentum over the last two and half weeks and a brief surge, the A2 Milk share price has resumed this trend today with a large fall:

Source: tradingview.com

There were some wins for in the A2 Milk results presentation, including NPAT growth of 47% and a corresponding amount of growth in its China Group revenue up to NZ$1.06 billion. Despite this, the numbers released by the company fell short of investors’ lofty expectations. We take a look at some of the other highlights from the results and the long-term outlook for the company.

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Highlights from the A2 Milk results presentation

Here are the main points from the presentation:

  • Total revenue of NZ$1.3 billion
  • EBITDA of NZ$413.6 million up 46.1%
  • NPAT of NZ$287.7 up 47%
  • Cash balance of NZ$464.8 million
  • 4% market share in China with Group revenue of NZ$1.06 billion up 46.9%

The strong results were underpinned by a significant marketing spend of NZ$135.3 million.

A2 Milk has also seen strong growth across its product segments, in particular its infant nutrition segment which makes up the bulk of its earnings:

Source: newswire

Perhaps the biggest story for the company though is its inroads into the Chinese market.

It saw China label revenue rise 100% via Mother Baby Stores and modern trade.

But unfortunately for the company, analyst EBITDA margin expectations were not met.

A2 Milk expects FY20 EBITDA as a percentage of sales to largely align with their 2H19 EBIDTA margin of 28.2%.

And The Australian Financial Review reports that the EBITDA margin outlook consensus was 31.6%.

Consequently, with downgrades potentially in the offing, the A2 Milk outlook section of the results presentation played a big part in today’s fall.

Long term A2 Milk’s outlook remains positive

This could be a buying opportunity depending on how you look at it.

The company expects their marketing efforts to continue to generate growth across its key regions, particularly China and the US.

Despite today’s fall, there are reasons to remain positive about A2 Milk.

The long-term story here is the growth in the Chinese middle class, which has an increasing taste for Western products.

Although the country is having to weather a trade war, the rise of the Chinese middle class is unlikely to be stopped by a series of tariffs.

As a result, A2 Milk investors can look forward to increased market share if the company continues the way it is currently going.

There may be a few blips along the way, with the risk of a debt crisis in China potentially denting consumer spending.

But since infant formula could be considered a staple, it would appear as if A2 Milk’s primary product will be immune to the vagaries of cyclical spending habits.

Because of this, the A2 Milk results underline our view that the company would be a long-term hold despite the various risks present in China.

Regards,

Lachlann Tierney

For Money Morning

PS: Aussie infant formula companies have been a big hit in China. But do you know about these three ways to profit from the growing Chinese middle class? You can download our free report on the topic here.


Lachlann Tierney is a writer for Money Morning 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. Recently he has been working with Ryan Dinse. Ryan is involved in three publications:


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