A2 Milk Company Ltd (ASX: A2M) shares had a month to forget in August.
During the period, the infant formula company's shares lost 22% of their value.
Image source: Getty Images
Why were investors selling A2 Milk shares?
Investors were selling the company's shares last month following the release of its FY 2024 results.
As a reminder, for the 12 months ended 30 June, A2 Milk posted a 5.2% increase in revenue to NZ$1,675.5 million. This top line growth was driven largely by its China & Other Asia segment, which reported a 14.1% increase in revenue.
And with the company's net profit margins improving slightly, this ultimately led to A2 Milk reporting a 7.7% increase in net profit after tax to NZ$167.6 million.
Unfortunately, this was short of the market's expectations and put some pressure on A2 Milk's shares. For example, Bell Potter was expecting the following:
Revenue of NZ$1,676m was up +5% YOY (vs. BPe NZ$1,690m and guidance of low-to-mid-single growth). EBITDA of NZ$234.3m was up +7% YOY (vs BPe of NZ$237.3m and VA consensus of NZ$235.5m). EBITDA ex-MVM was NZ$254.8m (vs. BPe of NZ$266.5m). Underlying NPAT of NZ$167.6m was up +8% YOY (vs. BPe of NZ$172.9m and VA consensus of NZ$172.1m).
What else?
The main reason the company's shares were sold off last month was its guidance for FY 2025. This was well below expectations due to challenging trading conditions.
In FY 2025, A2 Milk is expecting mid-single digit revenue growth and an EBITDA margin that is "broadly similar to FY24." It also warned that its first half margins are likely to be lower due to air freight impacts before rebounding in the second half.
In response to its guidance, Bell Potter commented:
Key outlook comments include: (1) FY25e revenue guidance of mid-single digit revenue growth (BPe of +7.4% and VA consensus of +8.0%); (2) FY25e EBITDA margins are expected to be broadly consistent with FY24 levels at 14% (BPe of 15.4% and VA consensus of 15.2%), with 1H25 down YOY and 2H25 up; (3) FY25e operating cash conversion to be below 100% reflecting SM1 settlement payments.
Should you invest?
The team at Citi thinks this is a buying opportunity for investors. Even after downgrading its estimates and valuation, the broker sees major upside potential from its shares over the next 12 months.
The broker has put a buy rating and $7.04 price target on them. This suggests that they could rise 24% from where they currently trade.
