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…

| More on:
AGL capital raise demerger asx growth shares represented by question mark made out of cash notes

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

More on Broker Notes

Broker written in white with a man drawing a yellow underline.
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers believe that now could be the time to snap up these stocks.

Read more »

A man clenches his fists in excitement as gold coins fall from the sky.
Broker Notes

Top broker says these ASX stocks can rise 35% in a year

Let's see why Bell Potter thinks these shares could rise strongly over the next 12 months.

Read more »

A man has a surprised and relieved expression on his face. as he raises his hands up to his face in response to the high fluctuations in the Galileo share price today
Broker Notes

These ASX shares could rise 20% to 50%

Analysts are tipping these shares to rise strongly over the next 12 months.

Read more »

A female ASX investor looks through a magnifying glass that enlarges her eye and holds her hand to her face with her mouth open as if looking at something of great interest or surprise.
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

Doctor doing a telemedicine using laptop at a medical clinic
Healthcare Shares

3 small-cap ASX healthcare shares 'with strong prospects'

Fund manager IML discusses why these 3 ASX healthcare shares are likely to rise in value.

Read more »

a man wearing old fashioned aviator cap and goggles emerges from the top of a cannon pointed towards the sky. He is holding a phone and taking a selfie.
Broker Notes

7 ASX All Ords shares elevated to 'strong buy' status in October

The brokers turned bullish on these ASX companies last month.

Read more »

Five young people sit in a row having fun and interacting with their mobile phones.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A male electricity worker in hard hat and high visibility vest stands underneath large electricity generation towers as he holds a laptop computer and gazes up at the high voltage wires overhead.
Energy Shares

AGL share price dives 7% on broker downgrade

Broker Barrenjoey has released a note forecasting lower earnings for AGL between FY26 and FY30.

Read more »