A2 Milk’s recent update suggests that its product shortages in China have been resolved. The financial pain was a -$53 million hit to FY26e sales and -$33 million hit to EBITDA. Given A2 Milk’s disclosure, it appears the loss on China label sales was over $100 million, with half of the customers lost to competitors and half switching to A2 Milk English label. Re-capturing lost customers will take time and keeps us cautious on any sales recovery. On margins we are more optimistic about FY27e as Pokeno losses unwind and the supply chain has more inventory buffers.

A2 Milk’s downgrade to guidance will hurt FY26e EBITDA but the impact in FY27e should moderate. We lower our FY26e EBITDA by 12% and FY27e by 6%. For FY28e, our downgrade is only 3%. The downgrade is mostly a function of lower shipments of infant formula given reduced supply from its manufacturer and longer approvals for customs clearance. Higher air freight costs account for close to one-third of the downgrade.

A2 Milk reported a strong improvement in underlying earnings. On a continuing business basis, revenue rose 19% and EBITDA was up 18%. The Pokeno acquisition was a loss-making contribution in the half pointing to even stronger performance in 1H26. The sales result was helped by acquisitions and currency, which will fade into 2H26e. While China infant formula growth was good, more meaningful market share gains would be more encouraging. The company lifted its guidance metrics for FY26e and should meet its $2 billion revenue target this year. We would prefer a little more margin for safety in the valuation given its reliance on China infant formula growth.

We initiate coverage of a2 Milk with an Underweight rating and $8.00 target price. a2 Milk has shown a strong recovery in sales and profit margins following COVID-19 disruptions. The prospect for growth remains good over the next three years but it will increasingly be focused on China label infant formula, despite a soft industry backdrop. a2 Milk’s acquisition of the Pokeno facility and divestment of Mataura Valley Milk (MVM) will boost EBITDA margins with a 220bp uptick from the divestment of MVM and a further 130bp through the internalisation of production at Pokeno. We see EBITDA margins reaching 20% by FY30e. a2 Milk has good growth prospects, but the growth is narrowly focused on China infant formula sales, which has some risk.