Should you buy the A2 Milk Company Ltd (ASX: A2M) share price dip? 

The A2 Milk Company Ltd (ASX: A2M) share price has slumped more than 15% since the release of its FY21 outlook and more than 25% since highs back in July. Is the recent share price slump an opportunity to buy the market darling for cheap, or should more caution be exercised? 

FY21 outlook 

The updated FY21 outlook unravelled a number of factors slowing the growth of the infant formula giant. The company first noted the flow-on effect of pantry destocking continuing into FY21 following a strong sales uplift in 3Q20. Furthermore, reduced tourism, international students and lockdown measures will result in lower than anticipated sales to retail daigous in Australia. The stage 4 lockdown in Victoria will also serve as an additional disruption to corporate daigous and resellers. A2 anticipates that the disruption in daigou channels will continue for the remainder of the first half of FY21. Daigou channels represent a significant proportion of infant formula sales in Australia & New Zealand and it expects ANZ revenue to be materially below plan for the first half. 

Despite such challenges, the business continues to see strong underlying consumer demand in China. It believes the daigou challenge is largely a logistical issue which should be temporary, assuming the stabilisation of COVID-19 related issues. The other areas of business including liquid milk in Australia and the USA, and local China business continues to perform well. 

All things considered, the company forecasts FY21 revenue to be in the range of $1.80 billion to $1.90 billion. This would represent a year on year increase of between 4-9%. 

Is it worth buying the A2 Milk share price dip? 

The company is expecting a flat 1H21 with growth picking up in the second half. On a more positive note, it highlighted that the sale of infant formula through the daigou channel is only one component of its multi-channel and multi-product sales strategy into China. It believes that its mother and baby stores (MBS) and new baby cross-border eCommerce (CBEC) sales will represent an increasing proportion of infant nutrition over time. This diversification will reduce the dependency on the daigou channel.

With that said, the reopening of borders and recovery in consumer spending is still an unknown variable given the fluctuations in COVID-19 cases and lockdown measures. Furthermore, it is difficult to tell whether Chinese tourists and students will visit or return to Australia.  

From a valuation perspective, A2 Milk sits at a reasonable price-to-earnings (P/E) ratio of 28. However, should business conditions continue to swing against the company, its share price could be in for another discount. 

Foolish Takeaway

A2 Milk has been a longstanding market darling of the ASX. Its share price ticked green today after 5 consecutive days of harsh selling. The $14 mark could be an indicative bottom. While I would be cautious with trying to catch the bottom, I am also optimistic about how the A2 Milk share price will deliver in 2H21 and beyond. 

More reading

• Here are the 10 most shorted ASX shares
• Top brokers name 3 ASX shares to sell next week
• These were the worst performing shares on the ASX 200 last week
• These ASX growth shares could be strong buys in October
• The a2 Milk (ASX:A2M) share price crashed 17.5% lower in September

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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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