Shares in the A2 Milk Company Ltd (ASX: A2M) are trading lower today after acknowledging a media report concerning a potential class action against the company.
The claim is being put forward by A2’s shareholders, who bought shares between 19 August 2020 and May 7 2021, many of which have lost 62% of their capital on the back of four consecutive downgrades.
A2M share price
More pressure for A2
According to an article out of the Australian Financial Review this morning, law firm Slater & Gordon Limited (ASX: SGH) is leading the investigation.
It alleges A2 may have acted in a misleading or deceptive manner in breach of the Corporations Act, as well as potentially breaching continuous disclosure rules in relation to its earnings downgrades.
Last year, A2 was originally anticipating strong sales momentum and EBITDA margins between 30-31 per cent. However, the downfall of its much-needed daigou channel now means the company is expecting full-year revenue of around NZ$1.2 billion with EBITDA margins between 11-12 per cent.
Slater and Gordon said, “There may be basis to allege that by no later than August 19, 2020, a2 Milk was or ought to have been aware the full-year 2021 guidance did not adequately take into account a number of factors which would impact the company’s financial performance.”
One of these alleged factors was A2’s attempt to increase sales in its English infant formula through the use of discounting, which would’ve apparently had a negative impact on its daigou channel.
It also said that due to the lack of marketing activity, this also would’ve had a negative impact on its cross-border e-commerce (CBEC) channel.
Summary
With shares down 0.54% at the time of writing, it seems the market hasn’t reacted too negatively to today’s news.
With shares down 72% since their highs last year, it could be that most of the downside has been priced into its current valuation. Or, it could be the case that the market believes the potential class-action might not eventuate into anything of a serious nature.
Slater & Gordon is still considering its funding options but is considering seeking a cost order in the Supreme Court of Victoria – essentially meaning A2 could have to pay part of the legal costs involved.
Whatever the outcome is for this potential class action, A2 is one I’m happy to sit on the sidelines for now. For some more reading on A2’s shares, click here to read: A2 Milk shares are now below $6…Is it finally time to buy?
