A2 Milk Company Ltd (ASX: A2M) shares will be on watch today, A2 Milk has revealed its revenue outlook for FY21.
What did A2 Milk announce about FY21?
A2 Milk said there is significant uncertainty and volatility in market conditions because of COVID-19.
As a result, in the first half of FY21 the company is now expecting revenue of $725 million to $775 million (all figures are in NZ dollars). In the first half of FY20, the company generated revenue of $806.7 million – this means A2 Milk is expecting revenue to fall by 4% to 10.1%.
A2 Milk also said that group revenue for FY21 is expected to be in the range of $1.8 billion to $1.9 billion. In FY20 A2 Milk made $1.73 billion – which means over the whole year management are expecting revenue growth of 4% to 9.8%. A2 Milk is expecting a strong second half.
The FY21 group EBITDA margin is expected to be 31% (click here to learn what EBITDA is). That’s a small reduction from the EBITDA margin of 31.7% in FY20.
Why is A2 Milk expecting revenue difficulty?
A2 Milk said there is a combination factors which is likely to affect the FY21 first half result. There is the flow on effect on pantry destocking after the strong sales in the third quarter of FY20 and there is lower than anticipated sales to retail daigous in Australia due to reduced tourism from China and international student numbers.
The company said that in September it has seen additional disruption to the corporate daigou and reseller channel, particularly due to the stage 4 lockdown in Victoria. The contraction in the daigou channel is more than expected and without the replenishment orders that would typically be anticipated at this point, according to A2 Milk.
This is important because daigou channel sales represent a significant portion of infant formula sales of the Australia and New Zealand business.
But because the company is still growing strongly with its Chinese infant formula business, A2 Milk only thinks this is a “single channel logistics issue.” Management believe this is only a short term issue and things will improve after COVID-19 is stabilised in Australia.
Pleasingly, A2 Milk said all other areas of the business are strong, including the liquid milk segment in Australia and the US and the local China business. The marketing it has spent money on is having a positive impact.
Summary
It’s disappointing to see A2 Milk say that the first half is expecting to show a decline. I’m surprised it has taken this long for impacts to be felt on A2 Milk. Over the long term I think A2 Milk can still be a very strong business with a rising global market share of the dairy business. I would be willing to buy some A2 Milk shares for my portfilio.
However, there are other ASX growth shares that I like even more such as Pushpay Holdings Ltd (ASX: PPH).
