The A2 Milk Company Ltd (ASX: A2M) share price was uncharacteristically among the worst performers on the S&P/ASX 200 Index (ASX: XJO) in September.
The infant formula and fresh milk company's shares lost approximately 17.5% of their value during the period.
Why did the a2 Milk share price sink lower in September?
The entirety of the a2 Milk share price decline came in the final week of the month following the release of a trading update.
That update revealed that the company has started to observe emerging disruption to the corporate daigou and reseller channel. This was particularly the case during the Stage 4 lockdown in Victoria.
As a result of this disruption, management advised that it is witnessing a contraction in the daigou channel beyond its previous expectations. It is also not seeing the replenishment orders that would typically be anticipated at this point.
Combined with headwinds associated with pantry destocking following panic buying during the height of the pandemic, a2 Milk expects its first half sales to be lower than the prior corresponding period.
Management explained: "This disruption in the daigou channel is impacting our September sales and it is currently anticipated that this will continue for the remainder of the first half of FY21. Sales in the daigou channel represent a significant proportion of infant formula sales in our Australia & New Zealand (ANZ) business and, as such, we now expect ANZ revenue to be materially below plan for the first half."
FY 2021 guidance.
It is forecasting first half sales in the range of NZ$725 million to NZ$775 million, which will be down 3.9% to 10.1% from NZ$806.7 million a year earlier.
And while it expects things to pick up in the second half and lead to full year sales and profit growth, the level of growth is much slower than investors have become accustomed to.
In FY 2021 sales are expected to be NZ$1.8 billion to NZ$1.9 billion, which represents a 4% to 9.8% increase year on year.
As for its earnings, the company is forecasting an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 31%. This would result in EBITDA of NZ$558 million to NZ$589 million for FY 2021, up 1.5% to 7.1% from NZ$549.7 million a year earlier.
Is this a buying opportunity?
I expect trading conditions will remain subdued in the daigou channel for a little while to come due to international tourism restrictions, however, this appears to have been factored into its share price now.
In light of this, I think this share price weakness could be a good opportunity for investors looking to make a buy and hold investment.
Especially given its very positive long term growth outlook. This is thanks to its expanding fresh milk footprint, its growing distribution network in China, and its modest market share in the key market.
