Why this broker sees ~50% upside in the A2 Milk (ASX:A2M) share price

Is now the time to buy this struggling infant formula company's shares?

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The A2 Milk Company Ltd (ASX: A2M) share price is out of form again on Tuesday.

In afternoon trade, the embattled infant formula company's shares are down 2% to $5.25.

This leaves the A2 Milk share price trading within sight of its multi-year low of $5.04.

Is the A2 Milk share price weakness a buying opportunity?

According to a recent note out of Bell Potter, its analysts see a lot of value in the A2 Milk share price.

The note reveals that its analysts have retained their buy rating but trimmed their price target from $8.50 to $7.70.

Based on the current A2 Milk share price, this implies potential upside of 47% over the next 12 months.

What did the broker say?

While Bell Potter acknowledges that FY 2021 was a very disappointing year and near term trading will remain tough, it appears optimistic that a change of fortune is coming.

This is partly due to the work the company has done to manage its inventory.

It explained: "[Our] analysis would tend to imply that channel inventories across the board have been reduced and this is in line with comments that English label channels are now in line with A2M expectations and China inventories only modestly above."

"We think the market is underestimating the impact that inventory swaps and sales pullbacks [had] on FY21 and while this is unlikely to be recovered in FY22e, it gives a glimpse of the relative FY21 under earn relative to baseline. As YOY comparisons become softer in 2H22e and with inventory positions reduced we would anticipate a resumption of top line growth to ensue," the broker added.

FY 2022 and FY 2023 forecasts

In light of this, the broker expects a 10.3% increase in sales to NZ$1,332 million and EBITDA of NZ$212.8 million in FY 2022. After which, Bell Potter is forecasting a 10.5% lift in sales to NZ$1,472 million and a 21.3% increase in EBITDA to NZ$258.2 million in FY 2023.

Based on these forecasts, the broker believes the A2 Milk share price is good value at the current level.

It concluded: "Our Buy rating remains unchanged. Sell-in rates materially lagged sell-out rates in 2H21, implying steps to reduce channel inventories have been effective. As revenues more closely align to point of sale trends we would expect top line growth to return, which could well be complemented by internalising supply chain costs in FY23-25e."

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia 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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