A2 Milk Not Immune to Coronavirus, but Long-Term Health Remains; NZD 16.30 FVE Maintained

Although narrow-moat A2 Milk initially benefited from pulled-forward consumer demand during coronavirus lockdowns in the second half of fiscal 2020, management’s reduced fiscal 2021 revenue expectations show that few companies are ultimately immune to the virus’ effects. As discussed in our note on Aug. 19, 2020, we had expected sales growth to slow in fiscal 2021, owing to pantry destocking after the strong pulled-forward demand in late fiscal 2020. But the company is now seeing disruption to sales partners in the corporate daigou channel given recent renewed lockdowns in Melbourne, Australia, which has driven down orders for infant formula that otherwise would have gone to China. While alternative channels, like retail stores and e-commerce, have continued to perform strongly in China, the daigou challenges look to constrain first-half fiscal 2021 revenue at about NZD 750 million, roughly 7% below the previous corresponding period, or pcp. The magnitude of this impact is greater than we thought, with full-year revenue guidance of NZD 1.8 billion to NZD 1.9 billion about 8% to 12% below our prior forecast.