Shares in ex-market darling A2 Milk Company Ltd (ASX: A2M) have fallen an additional 4% today, bringing the current share price down to around $7.30.
This means A2’s share price has fallen more than 63% since its highs last year. The last time its share price was trading around current levels was a little over three years ago.
A2M share price
Why are A2’s shares falling?
No obvious announcements have been made by the company that would be an obvious catalyst. However, it seems like the sentiment surrounding Australia’s relationship with China hasn’t been improving, which might partly explain why A2’s shares continue to trend downwards.
The good news is A2’s infant formula products are actually sourced in New Zealand, meaning it might be able to avoid tariffs and other measures imposed by Chinese authorities.
Having said this, some brokers have downgraded their valuations for A2’s shares, citing that many Chinese consumers have actually been preferencing domestic products over international brands recently.
So while A2’s products have been spared by Chinese regulations for the moment, the implication is that the Daigou channel may not emerge as strong as some originally anticipated even as Chinese tourists and students gradually start returning to Australia.
An additional concern some brokers hold relate to its inventory that could potentially go out of date, forcing many retailers to discount their current stock.
Time to buy A2’s shares?
There are certainly some good cases to be made on both sides of the argument.
A2 has been dealt an incredibly tough set of circumstances over the past 12 months and it seems these conditions will remain challenging while the pandemic continues to keep international borders shut.
While borders reopening would be the obvious catalyst to turn the company around, there’s now the possibility that the Daigou channel might not be what it once was as Chinese consumers shift to domestic products.
On the other hand, A2’s shares have now lost over 63% of its value, so is this potentially a deeply undervalued stock that’s out of favour with the market?
Personally, I’ll be waiting on the sidelines for now and monitoring signs of a recovery.
Management has downgraded guidance multiple times and I’d rather wait until it appears that trading conditions are improving.
If you’re interested in reading about potential catalysts and roadblocks that may lie ahead for a2 Milk, check out these articles: