The A2 Milk Company Ltd (ASX: A2M) share price could come under pressure on Monday after the release of an update on its outlook for FY 2021.
What did a2 Milk announce?
This morning the company revealed that in September it has started to observe emerging disruption to the corporate daigou/reseller channel, particularly during the Stage 4 lockdown in Victoria.
As a result of this and previously highlighted issues relating to pantry destocking following panic buying during the height of the pandemic, management advised that it is witnessing a contraction in the daigou channel beyond its previous expectations. It is also not seeing the replenishment orders that would typically be anticipated at this point.
Unfortunately, this weakness is expected to persist during the remainder of the first half.
Management commented: “This disruption in the daigou channel is impacting our September sales and it is currently anticipated that this will continue for the remainder of the first half of FY21. Sales in the daigou channel represent a significant proportion of infant formula sales in our Australia & New Zealand (ANZ) business and, as such, we now expect ANZ revenue to be materially below plan for the first half.”
It’s not all doom and gloom.
One positive is that management believes this weakness is isolated to the daigou/reseller channel.
It notes that its China-based infant formula business is growing strongly, along with the rest of the business.
Management also believes that the weakness in the daigou channel will prove to be temporary, assuming stabilisation of COVID-19 related issues in Australia.
FY 2021 guidance.
In light of the above, the company expects its first half revenue to be in the region of NZ$725 million to NZ$775 million. This will be a 3.9% to 10.1% decline on the revenue of NZ$806.7 million it recorded in the prior corresponding period.
Looking further ahead, management has provided full year revenue guidance of NZ$1.8 billion to NZ$1.9 billion. This represents a 4% to 9.8% increase year on year.
It is also forecasting an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 31%.
This would result in EBITDA of NZ$558 million to NZ$589 million for FY 2021, up 1.5% to 7.1% from NZ$549.7 million a year earlier.
If the a2 Milk share price crashes lower today, the insiders that sold millions of shares at the end of August will no doubt be relieved to have locked in their gains at a higher price.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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