Is the worst over for the A2 Milk (ASX:A2M) share price?

This leading broker thinks the worst is over for the A2 Milk Company Ltd (ASX:A2M) share price and has upgraded it to a buy rating…

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It certainly has been a tough 12 months for the A2 Milk Company Ltd (ASX: A2M) share price.

The infant formula and fresh milk company’s shares are down a massive 57% since this time last year.

This leaves the a2 Milk share price trading close to multi-year lows.

Why is the a2 Milk share price out of form?

The a2 Milk share price has come under pressure over the last 12 months due to its bitterly disappointing performance during COVID-19.

While the company was actually a big winner from stock piling at the height of the pandemic, it has been downhill from there.

Weakness in the daigou channel and pantry destocking led to management making a series of earnings guidance downgrades.

Unfortunately, trading conditions remain tough and FY 2022 is starting to look like it could also be impacted by the same headwinds.

When will it be time to invest again?

While trading conditions are tough for the company, one leading broker believes the weakness in the a2 Milk share price has created a buying opportunity.

According to a note out of Bell Potter, its analysts have upgraded the company’s shares to a buy rating with a $9.50 price target.

This implies potential upside of almost 17% for its shares over the next 12 months.

What did it say?

The broker made the move on the belief that it is witnessing early signs of a reversal in the issues that preceded the recent downgrade cycle.

It explained: “YOY declines in finished IMF exports from Australia to China (Daigou proxy) continue, however, we have witnessed two sequential monthly gains since the Dec’20 lows. This uplift has occurred in a period we typically wouldn’t expect to see this.”

“When viewed in conjunction with a reduced [inventory] infill, this could imply the early stages of inventory levels beginning to recede,” it added.

Another reason the broker is positive is a2 Milk’s opportunity in store in mainland China. Its presence has been growing quickly but still has a long way to go.

The broker commented: “Total offline distribution points looked to approach ~30k in the March quarter. At this level, A2M’s offline presence is still materially below that of H&H (~80k) and Feihe (~110k). The runway in distribution expansion has the scope to mitigate the headwinds of declining China births (-15% YOY in CY20).”

All in all, Bell Potter appears to believe the worst is over for the company and the a2 Milk share price now.

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Motley Fool contributor James Mickleboro 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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