The a2 Milk Company Ltd [NZX:ATM] [ASX:A2M] has experienced a stock value drop of over 14% today. This happened when bearish trading impacted the market.

The company exclusively owns and licences intellectual property for the production of a2 dairy products, which has proven wildly popular with Chinese consumers.

a2 has a strong presence on both the Australian and New Zealand stock exchanges. At the time of writing, the company has a market capitalisation of $12.05 billion.

 

Why has the [NZX:ATM] [ASX:A2M] share price fallen?

 

It’s been an abysmal day for a2 Milk.

Here are the key highlights from the company’s announcement:

  • The COVID-19 pandemic has negatively impacted imports into China.
  • In particular, Chinese resellers known as ‘daigou’ have seen their businesses disrupted due to lockdowns in the country.
  • As a result, first-half revenue for a2 Milk is anticipated to drop to around $725m, compared to $805.3m in the previous period.
  • The group EBITDA margin for 2021 is projected to be 31%, compared to 31.7% in the previous year.

This bleak news has given rise to a negative sentiment. This has led to a quick sell-off for the company’s shares.

 

Where could [NZX:ATM] [ASX:A2M] go from here?

 

China remains the single largest market for a2 Milk, with ‘daigou’ resellers representing a big chunk of its dairy supply chain. Therefore, the COVID trade disruption will continue to be felt in the short to medium-term.

However, it’s important to note that the company’s position in the infant-formula market still remains strong. Chinese parents have an emotional connection to the a2 brand. They may continue to support it strongly, despite the stormy outlook.

a2 CEO Geoff Babidge believes there is continued upside for the company’s operations globally:

‘The performance in all other areas of our business is strong, including our liquid milk businesses in Australia and the USA. Importantly, our local China business is performing strongly, notably in Mother & Baby Stores (MBS), which we anticipate will continue.’

Will a2 Milk weather this storm and come out stronger?

For now, it’s a case of wait-and-see.

 

Regards,

John Ling,
Analyst, Wealth Morning

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