The A2 Milk Company Ltd (ASX: A2M) share price is heading in the right direction at long last.
In morning trade, the fresh milk and infant formula company's shares are up 3% to $5.87.
Though, this is little comfort for longer term shareholders. The a2 Milk share price is still down 50% since the start of the year.
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Is the a2 Milk share price good value?
One broker that doesn't think investors should be rushing in to invest is Morgans.
This week the broker retained its hold rating but slashed its price target down by 20% to $6.65.
Morgans is expecting a2 Milk to deliver earnings per share of 11.2 cents in FY 2021 and then 23.3 cents in FY 2022.
Based on these forecasts, the a2 Milk share price is currently trading at 25x estimated FY 2022. Which, despite its 50% decline in 2021, certainly isn't cheap given the high levels of uncertainty it is facing.
What did Morgans say?
It commented: "We have reduced our FY21/22/23 NPAT forecasts by 57.5%/26.0%/25.5%. In FY22, we forecast 100% NPAT growth however we stress that a large component of this growth reflects a reversal of the FY21 provision and one-off items."
"While we expect earnings growth to resume at A2M from FY22 onwards, we forecast it to be much less than in the past reflecting regulatory changes and border restrictions impacting the daigou, China's declining birth rate and increased competition from Chinese companies (government has a 60% self-sufficiency target)," it added.
Inventory issues
Morgans also commented on the significant inventory issues it is facing and notes that the future performance of the a2 Milk share price will be dependent on whether the actions it is taking are successful.
It explained: "A2M has too much inventory in its relevant channels. Consequently, the company is now taking more aggressive measures to fix its business. Not only is A2M replacing new IF tins for old tins which are nearing their used by date, it is also rebalancing inventory by further reducing sell-in to the daigou/reseller and CBEC channels. Consequently, a stock provision of NZ$103.3-113.3m will be recorded in FY21."
"The question is whether this write-off is enough and what damage it does to brand health metrics. A2M cautioned it will take some time to rebalance inventory and restore channel health and an immediate recovery is not expected," Morgans added.
What happens from here, only time will tell. But one thing that is more certain, is that it looks set to be a volatile ride for the a2 Milk share price over the next 12-24 months.
