A2 Milk Company Ltd (ASX: A2M) shares will be on watch next month when it releases one of the most highly anticipated results of reporting season.
Ahead of the release, I thought I would look to see what the market is expecting from the embattled fresh milk and infant formula company.
What is the market expecting?
The last 12 months have been very tough for a2 Milk, leading to countless earnings guidance downgrades. In light of this, expectations are very low for its result in August and this has been reflected in the performance of a2 Milk shares over the period. Since this time last year, the a2 Milk share price has lost a whopping 70% of its value.
According to a note out of Goldman Sachs, its analysts are forecasting revenue of NZ$1,221.1 million in FY 2021. This represents a 29.5% year on year decline and is at the low end of the company's last revised guidance of NZ$1.2 billion to NZ$1.25 billion.
Goldman explained: "We forecast the key decline to come from the ANZ division driven by continued impact on the Daigou channel with sales at NZ$573.1mn (-40.7% yoy). We expect direct sales into China/other Asia to also be down -18.2% to NZ$572.0mn."
In respect to earnings, Goldman expects the company to achieve its revised EBITDA guidance of NZ$132million to NZ$150 million. It is forecasting EBITDA of NZ$140.7 million, down 74.5% year on year.
Finally, on the bottom line, the broker expects a2 Milk to reported a 74.7% decline in underlying net profit after tax to NZ$98.1 million.
Will it pay a dividend?
While the company has suggested that it could consider capital returns, Goldman Sachs isn't expecting this to be the case in FY 2021.
It commented: "While we forecast operating cash flow to be down -87.5% to NZ$53.5mn, we expect capital expenditure for FY21 to increase significantly to NZ$50mn vs. NZ$5.8mn in the prior year. We do not expect the group to pay final dividends and expect it to maintain a net cash position of NZ$806mn at the end of June 2021."
Are a2 Milk shares in the buy zone?
The note reveals that Goldman Sachs continues to sit on the fence with a2 Milk. It has retained its neutral rating and $6.96 price target on a2 Milk shares. Based on the current a2 Milk share price, this implies potential upside of 13% over the next 12 months.
As attractive as that potential return may be, Goldman doesn't appear to believe the risk/reward on offer with a2 Milk shares is compelling enough to upgrade its shares to a buy rating.
