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A2 Milk (ASX:A2M) shares and one other slapped with sell ratings

Dairy ASX share price represented by fish eye view of dairy cows in paddock
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A2 Milk Company Ltd (ASX: A2M) and Bubs Australia Ltd (ASX: BUB) shares have slumped to multi-year lows as COVID-19 has put a halt on any near-term growth prospects.

While some investors may perceive these heavily discounted infant formula shares as a bargain, Citi thinks the Bubs and A2 Milk share prices are headed lower. 

A2 Milk share price rated as a sell 

Citi analysts have paid close attention to the results of Feihe, the largest and most highly recognised Chinese infant milk formula company. Feihe reported an online and offline market share of 17.20% in Q3 2020, with an ambitious goal to have at least 30% market share by 2023. The broker believes that competition is likely to continue for foreign infant milk formula players such as A2. 

Citi maintained a sell rating for A2 Milk shares with a $7.15 target price. The broker believes that reseller inventory could be moving closer to expiry, forcing them to sell it at a discount. 

Taking a look at the bigger picture, Citi highlights ongoing pressures with birthrates as a threat to infant formula demand. It also believes that Australia-China geopolitical tensions could ultimately restrict inventory flow.

Citi isn’t the only one bearish on the A2 Milk share price. The Commonwealth Bank of Australia (ASX: CBA) announced on Tuesday it had reduced its stake in A2 Milk from 46.9 million shares or 6.34% of the company to 39.5 million shares or 5.32%. 

Bubs also slapped with a sell 

Citi also highlighted increasing competition as a key challenge for the Bubs share price. The growing market share of Chinese brands is likely to weigh on its growth prospects. 

The broker believes that COVID-19 has delayed and increased the uncertainty with the company’s pathway to profitability. As a result, Citi rates the Bubs share price as a sell with a 35 cent target price. 

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Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool Australia has recommended BUBS AUST FPO. 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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