I bought today after the fall for long term..probably too early
Good evening qldfrog
Reckon medium/long term shareholders wouldn't be to disheartened by today’s decline. Plenty of positives in the overall mix - more babies in China ...
; takeover possibility ..... ?
AFR article of interest, enjoy:
A2 Milk faces headwinds from China ahead of interim results
Carrie LaFrenzSenior reporter
Feb 20, 2022 – 4.40pm
The a2 Milk Company will look to put the negative events of 2021 behind it and update the market on the progress of a
major strategy overhaul flagged last year when it presents its interim results on Monday.
The company had an incredible growth story, but its steep fall from grace last year has split the market over its prospects for recovery. Full-year sales in 2021 fell 30 per cent, underlying earnings plunged 76 per cent, and net profit tumbled 77 per cent.
Chief executive David Bortolussi has been at the helm of the dual-listed baby formula and fresh milk
company for one year.
Last October he presented a detailed, fresh approach at the group’s investor day, with guidance that first half 2022 sales would be down for both English and Chinese label formula. This was due to a2 Milk deliberately constraining product in an attempt to deal with its ageing inventory issues. Mr Bortolussi skipped earnings guidance at the November annual meeting.
The consensus of analysts’ earnings before interest, taxes, depreciation, and amortisation (EBITDA) forecasts sits at $NZ81 million ($75.63 million) for the first half of fiscal 2022.
CSLA analyst Richard Barwick recently cut his call to “underperform” from “outperform”. His latest channel checks indicated mixed signals for both a2’s pricing and age of in-market inventory. “In short, the previous trend of improvement for both seems to have stalled over the last month or so, which throws up question marks on the pace of recovery,” he said. Mr Barwick downgraded his 2022 revenue forecasts for the English label formula, which dragged his price target down $5.80 from $6.10 per share.
He said with fresher inventory being supplied into the channel, the age profile of a2 Platinum formula has improved slightly and the proportion of inventory over 12 months old has declined across all stages. This is important, since Chinese mothers view formula over 12 months old as aged and spurn it. The $3.9 billion company is a top 25 most-shorted stock on the ASX, with 5 per cent of its register held short, according to shortman.com.au.
The stock closed on Friday at $5.26, down 4¢. A year ago, it was fetching about twice that – $10.53 per share. In mid-2020 it traded at its all-time high of nearly $20 a share. Further pressure on the price led Perpetual to continue to top up its stake last year, with the fund manager now controlling 6.1 per cent of a2 Milk, making it the largest shareholder.
Wilsons head of research James Ferrier said a2 Milk still faces conjecture from investors over the macro picture in China,
such as the falling birth rate, consumers favouring local brands and the related increase in competition, which is driving up marketing spend. “The question is, is this temporary? Do these trends reverse and provide a more favourable trading environment for a2?” Mr Ferrier told
The Australian Financial Review.
“While the dust has settled a bit more around inventory issues, channel partner margins and new management, investor attitudes are still divided around the uncertainty in this macro environment.” Mr Ferrier has a “market weight” call and $6.02 target price. Consensus estimates have a2 Milk trading at 29 times fiscal 2023 earnings. “A2 still has that attraction of premium brand and offshore growth opportunities with China front and centre, so they tend to trade on a higher multiple than a traditional FMCG [fast-moving consumer goods] business that is purely a domestic story,” Mr Ferrier said.
A2 Milk plays in the premium end of the market for both baby formula and fresh milk. It has solid share of Australian fresh milk and also is sitting on a cash pile, although Mr Bortolussi is investing for growth rather than deploying capital management or paying dividends.
Infant formula is its main earnings generator. The China infant formula market remains the largest and most attractive in the world, with retail sales of about $NZ47 billion ($43.9 billion). But in 2021, volume growth started to decline, with retail pricing now under pressure. Chinese consumers are no longer prioritising international brands, and are looking to local competitors such as Feihe, Junlebao, Mengniu and Yili. Beijing is also pushing more breastfeeding.
Barrenjoey’s head of consumer research, Thomas Kierath, sees China’s birth rate as the key earnings driver, while the rising cost of living in China (notably housing) and the rising average age of marriage will act as a drag on the number of marriages and ultimately births. “A2 faces an uncertain future, given unfavourable demographics in China, greater competition, little innovation and a changing channel mix,” he said.
Mr Kierath thinks a2 Milk is a takeover target, and so does Credit Suisse hedge fund
sales trader Sujit Dey.
Citi analyst Sam Teeger has a “buy” call on a2 Milk, and agreed that the birth rate is the key risk for a2 Milk.
But he also said that if more foreign players exit the China market due to lower growth prospects, higher cost of compliance and a greater need to invest in the market, it could allow a2 Milk to differentiate its product and snare market share.
Mr Teeger added that the
daigou channel could also potentially start to recover from a low base, with Australia re-opening its border for international tourism on Monday. Time will tell if the once highly profitable retail daigou sector – an informal channel of imports to China – will return. With the onset of travel restrictions amid COVID-19 nearly two years ago, this channel to market disappeared virtually overnight.
Have a very nice week.
Kind regards
rcw1