The longstanding market darling status of the A2 Milk Company Ltd (ASX: A2M) share price is likely causing many investors to feel frustrated and trapped.
The company’s history of strong earnings growth has made its shares look like good value. Previously at $16 back in September 2020, at $14 levels in November 2020, and $10 levels in January. Now, here we are, at $8 in April.
As the A2 Milk share price continues to grind lower, Bell Potter has emerged with a report on Tuesday upgrading its shares from hold to buy. At the time of writing, the A2 Milk share price is trading at $8.24, up 4.17%.
Why there could be long-term value in the A2 Milk share price
Bell Potter has taken a more positive view on the A2 Milk share price. This is due to the belief that issues causing its recent downgrade cycle are reversing.
The report first highlights A2’s move to materially scale back its Australian infant milk formula (IMF) deliveries to address excess stock.
It notes that exports from Synlait Milk Ltd (ASX: SM1) to Australia were down 72% in the past 6 months since September 2020, relative to the 6 months to August 2020. Bell Potter said that “inventory infill appears to have materially contracted, addressing one element of the inventory build”.
In terms of Australian exports to China, the report highlights two sequential monthly gains in finished infant formula exports since the December 2020 lows. Interestingly, the broker did not expect an uplift to occur so early on, calling this an early sign of life.
A2 has increasingly pointed to its China-labelled infant nutrition growth to compensate for challenging daigou channels. In its half-year results, it noted that its offline distribution footprint had expanded to 22,000 stores, up from ~19,100 at the end of 2H20. Its rapid offline expansion has translated to a 2.4% market share in China. That is up from 2.0% at the end of FY20.
Bell Potter believes its offline distribution points are approaching the ~30,000 mark in March. While this may represent a significant uplift on 1H21, it is still below leading Chinese infant brands H&H and Feihe. These have a respective ~80,000 and ~110,000 stores.
The broker believes the uplift in offline stores will attempt to mitigate the headwinds of declining births in China, which is down approximately 15% year-on-year in 2020.
Share price finally receives an upgrade
The report upgraded the A2 Milk share price from hold to buy with a $9.50 12-month target price. With the A2 Milk share price currently trading at $8.30, this represents an upside of 14%.
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Motley Fool contributor Kerry Sun 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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