The A2 Milk Company Ltd (ASX: A2M) share price has sunk more than 10% as investors absorbed the weak outlook commentary.
A2 Milk is one of the largest infant formula producers in ANZ, and sells a large amount of products to China.
A2 Milk Company share price
FY23 result
Here are some of the highlights for the 12 months to June 2023:
- Revenue rose 10.1% to $1.59 billion
- EBITDA (EBITDA explained) went up 11.8% to $219.3 million
- Net profit after tax (NPAT) increased 26.9% to $155.6 million
- Profit / earnings per share (EPS) jumped 28.7% to $0.212
- Net cash declined 7.3% to $757.2 million
There was a very mixed revenue performance between the different segments.
The ‘China and other Asia’ segment grew revenue by 37.9%, USA revenue rose 27.1% and MVM sales grew 9.2%. However, ANZ revenue plummeted 30.2% “mainly due to an intentional change in England label distribution strategy”.
The China and other Asia segment revenue exceeded $1 billion for the first time, demonstrating the importance of its China-focused growth strategy.
The gross profit margin of 46.5% was 0.5 percentage points higher thanks to “English label refresh positioning and distribution model changes and the cycling of other nutritional stock write-downs recognised in the prior year.”
Inventory at the end of the period was $193.4 million, higher than at the end of the FY23 first half mainly because of stock building of China label inventory to accomodate the timing of the new China GB registration and product transition, as well as a “sharp decline in the daigou channel.”
Weak outlook hits the A2 Milk share price
The company said that Chinese infant formula market conditions are uncertain but “likely to become more challenging in FY24 with a further double-digit decline in market value expected”.
This is due to volume declines because of the rolling impact of fewer newborns in recent years on later-stage infant formula products, as well as a lower number of newborns expected in the 2023 calendar year. But, it is expecting more births in the 2024 calendar year.
On top of that, average selling prices “will remain under pressure” due to an “increase in competitive intensity driven by the market-wide transition to new GB product, excess manufacturing capacity and challenging macroeconomic conditions.”
It’s expecting to gain market share in FY24, but it needs to capture enough in a declining market. China labels is expected to outperform the England label, with overall infant formula growth expected to be weighed to the FY24 second half.
ANZ and US liquid milk are also expected to see “modest growth”. US infant formula sales are expected to be “immaterial”.
The FY23 gross profit margin and EBITDA margin are expected to be similar to FY23. It’s expecting low single-digit revenue growth in FY24.
Final thoughts on the A2 Milk share price
I’m not surprised it’s falling on this outlook, a declining market is not attractive operating conditions. I hope it does well into the future, but I wouldn’t call it an opportunity because of how much it relies on the Chinese market, which is unpredictable to say the least.
