A2 Milk was one of the glamour stocks of the year up to about three months ago when doubts emerged about the full impact of COVID-driven border closures and inbound tourism cutting sales of its products to Chinese daigou buyers in particular.
A2M shares most recent peak was on September 9 at $17.16 and up to the close on Friday had slumped 40%. Some 18% of that had come up to the update on Friday where the company revealed a near half-billion hit to revenue for the year to June 2020.
At one stage the shares were down more than 25% in early trading on Friday after telling the market that it expects the recovery in its Chinese-centric sales channels will be significantly delayed in the aftermath of the COVID-19 pandemic.
The first downgrade came in September, the day after the peak price was hit, and then at the AGM in November, management again downplayed the outlook for the year.
Friday saw the downgrade crystalise when the company warned the impact had been “more significant and protracted than was previously anticipated”.
“We believe [the recovery is] going to come slower from what our original expectations were,” interim CEO Geoff Babidge said. “Our expectation is there will be progressive improvement during the second half, but not as fast as we had previously expected.”
The weakness in the daigou channel has started appearing in other sales areas including its broader cross-border e-commerce (CBEC) business, as the daigou sales often stimulate demand for direct orders from China.
A2 Milk now expects its 2020-21 revenue to be between $1.4 billion and $1.55 billion, down between $250 million to $500 million from its September guidance.
Profit margins are also expected to be between 3% and 5% weaker than prior forecasts at around 26% to 29% (The December half margin will be around 27%).
Mr. Babidge said in the statement the company is now in “uncharted territory”, but is hoping to make up some of the lost sales by focusing on bolstering its CBEC channel along with A2 Milk’s own China label range, which the company sells through a range of mother and baby stores in the country.
Those direct sales though could be threatened by China’s increasingly aggressive stance on trade with Australia.
“We’re obviously continuing to ensure that we are driving forward those parts of the business that are performing well, but also we are looking at whatever we can do to support assisting the restoration of the daigou channel,” Mr. Babidge said
He said he would be concerned if China extended its list of sanctions to the dairy industry, but noted the current impact on A2 Milk’s business had more to do with the continuing impact from the COVID-19 pandemic rather than trade and other tensions.
