The A2 Milk Company Limited (ASX: A2M) share price continued its demise yesterday, hitting a fresh, 3-year low. Shares in the infant formula producer are down 37% year-to-date as the company battles multiple headwinds.
So, what is fuelling the fall of the A2 Milk share price and when will it recover?
At the time of writing, the A2 Milk share price is down 2.45%, trading at $6.98.
China souring A2 Milk share price
Despite being a perennial market darling, a2 Milk has struggled to absorb the full impact of the COVID-19 pandemic. With a large portion of the company’s sales relying on Chinese consumers, border closures and trade regulations have hampered the company.
Multiple earnings downgrades served as a catalyst for the A2 Milk share price to tank. The company attributed the poor performance to weakness in the daigou and cross-border e-commerce (CBEC) channels. With no tourism and international students coming into Australia, both the retail and corporate daigou markets have struggled.
This was reflected in the company’s half-year results which were released earlier this year. For the six months ended 31 December, the company reported a 16% decline in revenue to NZ$677.4 million. In addition, A2 Milk posted a 32.2% decline in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$178.5 million.
Recently, analysts at broker Morgan’s painted a dour outlook for a2 Milk. Despite being supporters of the company, analysts downgraded a2 Milk’s shares to a hold rating and issued a revised price target of $8.34.
Outlook for the share price
Although Morgans have a negative outlook for A2 Milk, analysts at broker UBS expect the contrary. Recently, analysts from the broker issued a buy rating on A2 Milk citing a meaningful recovery in indirect infant formula sales over the next 2 years. Analysts also noted that the company could make substantial gains in market share in China through offline roll-outs and expansion of a free trade zone.
Currently, A2 Milk is one of the most shorted companies on the ASX, with a 5.9% short holding. As long as international borders remain closed, A2 Milk will be dealt with a difficult trading environment. Therefore, the obvious catalyst for the company’s share price would be a re-opening of international borders. However, there is also the notion of demand as Chinese consumers could have shifted to domestic products during the pandemic. Another hurdle for A2 Milk is whether the Chinese government will impose tariffs or other restraints on its products.
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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