The a2 Milk Company (ASX: A2M) has announced an update to its FY21 outlook statement to the market today. COVID-19 has greatly impacted operations of the business, predominantly to the supply chain. A large component of A2M’s business is dependent on diagous. The literal translation for diagou is “surrogate shopping” and is a term describing cross-border exporting in which an individual or a syndicated group of exporters outside of China purchases commodities for customers in China. A2M relies on international students and Chinese tourists for some of its sales, which has been dampened due to travel restrictions and international students leaving the country. This slowdown was further exacerbated by the extended lock downs in Victoria.
The business notes this trend in reduced diagou channels may be ongoing for the first half of FY21. This will lead to a substantial reduction in sales from Australia and New Zealand – below their expectations. However, the company also mentions it believes this is a short-term supply chain issue which will normalize after the coronavirus. Other segments of the business have remained fully operational including liquid milk in Australia and the USA. Furthermore, the local China business is also performing strongly – particularly Mother & Baby Stores (MBS).
Based on the uncertainty and volatility caused by COVID-19, A2M has provided a new FY21 guidance:
- Group revenue 1H21: $725-$775m
- Group revenue FY21: $1.8-$1.9b
- Group EBITDA margin FY21: 31%
The A2M stock is trading down 10% at time of writing to reflect the above changes to consensus expectations. Analysts were expecting A2M to make $2.08b of revenue and $643m in EBITDA. However, these expectations now need to be brought down to match the company guidance.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.