27 October 2021
Lost your milk money today?
Oh my goodness, not again. All A2 Milk (ASX: A2M) did was hold its Investor Day today. It was a great chance for investors to get a lot of detail about what’s going on with this innovative Sydney-based dairy company. But instead of giving investors confidence in the company’s future, the stock has crashed more than 12% so far during the trading day.
The trouble with A2 Milk right now is that everyone is worried that it might not get its mojo back. So, any time the company says anything other than ‘we’re growing very strongly’, people assume the worst and sell.
How did we get here?
It all started to go wrong on 28 September 2020 when the company downgraded its FY21 earnings guidance. Okay, faeces happens. The problem is, that was only the first of four downgrades to come. There was another a week before Christmas 2020, another on 25 February 2021 and then another on 10 May 2021. By the time of that last debacle, A2 Milk stock could be had for just $5.12 a share. It was a long drop from the heady days of being above $19 a share in June 2020. Interestingly, ahead of today’s crash, the market had been doing some great base-building on this stock since May.
What’s causing all this trouble for A2M?
In a word, China. Selling infant formula into China isn’t as easy in 2021 as it was in 2019, because the usual easy Daigou channels haven’t existed since March 2020. That has meant A2 Milk has had to reinvent itself in China, marketing itself like any other supplier of quality dairy products. Today’s Investor Day presentation showed that A2 Milk is doing a good job on that reinvention.
But, as the old broker says in the film Wall Street, good things sometimes take time. Like, five years or so. A2 Milk’s five-year target for global sales is NZ$2bn, but that’s not much above the NZ$1.73bn level of FY20.
Daigou will likely be back at some point
Following today’s A2M update, the market acted like having a long growth path was the end of the world. But it isn’t. A2 Milk is one of the few really big developments in dairy in a generation. Think about it. This is milk without a protein called beta-casein A1. There’s a large and growing body of scientific knowledge that A1 is bad for you, but milk with just beta-casein A2 is good for you. As that message has gotten out to various markets, it’s won a lot of fans who won’t drink any other milk. But in most markets, you still can’t get A2 Milk’s products. We believe A2 Milk has a lot of growth ahead of it with or without China.
And don’t forget, the world is opening up now. That means Daigou of some sort are set to start again in the next twelve months. Maybe it won’t be as powerful as it was in 2019, but the way the market is behaving right now you’d imagine Daigou was a thing of the past. If you’ve never tried A2 Milk, we suggest you do. Believe us, it tastes good. It might even taste good to investors by 2025.
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