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Do brokers think the A2 Milk (ASX:A2M) share price is a buy or sell?

A2 Milk shares

The A2 Milk Company Ltd (ASX: A2M) share price has been pummelled since releasing its FY21-half year result.

As part of the update, the company gave the market its latest thoughts about where the revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) margin will end up by the end of the year.

FY21 expectations

Management said that revenue is going to be at the low end of its previous estimation range because of the impacts to the daigou channel sales and the fact it’s taking longer to recover than expected.

As a consequence of lower revenue, higher levels of brand investment/marketing, longer daigou/reseller support, movements in foreign currency and an adverse channel mix relative to what was anticipated in December.

Accordingly, the company is now expecting group revenue to be “in the order of $1.4 billion” and the group EBITDA margin for FY21 of between 24% to 26% (excluding Mataura Valley Milk acquisition costs).

Despite lowering guidance, A2 Milk said that this new guidance assumes the actions being taken to re-activate the daigou/reseller channel will deliver a significant improvement in quarter on quarter from the FY21 third quarter to the fourth quarter.

What did some brokers think of the A2 Milk share price?

Quite a few of the brokers said that the result was disappointing and below their expectations.

Broker Citi is particularly bearish about the infant milk company with an A2 Milk share price target of $7.15. The HY21 net profit of $120 million was 8% lower than what Citi was estimating it would be.

Citi has decreased its profit expectations for FY21, FY22 and FY23 by between 25% to 30% with demand adding to numerous ongoing issues confronting the company. The main reason for Citi’s profit expectation decrease is due to a slower daigou recovery as well as lower margins because of higher levels of incentives to reactivate the channel.

Other issues that Citi pointed to included higher production costs and adverse foreign currency movements, which is likely to affect margins. The broker thinks that margins are going to be hurt.

Ord Minnett is another broker that has turned more negative on the infant formula business because of the various challenges and longer recovery.

One broker does have a slightly more positive outlook for A2 Milk, though it fully acknowledges the difficulties. Morgans has a share price target for A2 Milk of $10.40. The broker thinks that A2 Milk can still deliver over the longer-term once channels can return to normal.

Looking at Morgans’ estimate for FY22, the A2 Milk share price is valued at 27x FY22’s estimated earnings.

At the current value, Ord Minnett thinks that A2 Milk shares are priced at 31x FY22’s estimated earnings.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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