Why have A2 Milk shares come off the boil again?

What's been happening with the infant milk company lately?

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Key points

  • A2 Milk shares have dropped nearly 19% since hitting a yearly high in February 
  • A2 Milk shares previously soared 37% between 1 November and the February high 
  • The company and analysts cited China's birth rate and changes to the nation's registration process for infant formula as risks going forward  

A2 Milk Company Ltd (ASX: A2M) shares have been up and down in the past few months.

The infant milk formula company's share price has plunged almost 19% from a yearly high of $7.10 on 17 February to its current share price of $5.795.

This drop came after A2 Milk shares soared nearly 37% from $5.20 between the start of November last year and the February high.

Let's take a look at what has been going on with the A2 Milk share price.

What's happening?

Despite reporting double-digit revenue and earnings growth in H123 financial results, concerns about the market in China appear to have been weighing on A2 Milk shares lately.

On 20 February, A2 Milk reported a 10.5% lift in earnings before interest, tax, depreciation and amortisation (EBITDA) to $107.8 million and an EBITDA sales margin of 13.8%.

But the company warned of challenges facing infant milk formula (IMF) sales in the Chinese market. This includes births in China declining 10% to 9.6 million in the 2022 calendar year. The company said:

The overall China IMF market declined 11.0% in volume and 12.5% in value in 1H23. The market decline reflected the decrease in births in CY22 along with the rolling impact of fewer births in prior years reducing stage 3 IMF sales.

On a positive note, A2 Milk reported 18% IMF sales growth in the first half of H123, despite the 12.5% overall IMF market drop in China. And the company reached "historical highs" in China brand awareness.

Commenting on A2 Milk's brand in quotes cited by the Sydney Morning Herald recently, Morgans senior analyst Belinda Moore said:

A2M has built a strong brand around the health benefits of its milk products that only contain the A2 beta casein protein type. Its premium products attract a premium price.

Another potential challenge for a2 Milk going forward is the company's registration of its China label IMF product to a new GB (national) standard. In September, the company advised its China label product had been renewed until 21 February.

In its H123 results presentation on 20 February, A2 Milk noted this registration process as among "key risks" in FY22. The company said:

While the new GB registration process is progressing, timing is uncertain and subject to SAMR approval.

Moore (from Morgans) also touched on this challenge in the SMH article, highlighting that if approval was not received, this could impact the A2M's overall group sales by about 30%.

Meanwhile, the team at Bell Potter cut its rating on the A2 Milk share price in March from a buy to hold with a price target of $6.80.

The broker said:

We downgrade from buy to hold. Ultimately A2M and SM1 balance dates don't align and SM1 issues may simply reflect restocking and destocking decisions on the part of A2M around SAMR registration.

A2 Milk share price snapshot

The A2 Milk share price has soared nearly 23% in the past 12 months. However, it has fallen about 16% in the year to date.

A2 Milk has a market capitalisation of about $4.2 billion based on the latest share price.

Motley Fool contributor Monica O'Shea has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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