It has been a difficult year for the A2 Milk Company Ltd (ASX: A2M) share price. Could things turn around in 2022?
In 2021 to date, A2 Milk shares have dropped 53%.
But from here, is the outlook good for the business? Or could things turn even more sour?
Analyst opinions on the A2 Milk share price's prospects in 2022
Brokers are mixed on the business.
Credit Suisse is neutral on A2 Milk, with a price target of $5.75. That implies a mid-single digit return over the next 12 months with A2 Milk starting to regain some pricing power.
Citi has a buy rating on the business, with a price target of $7.30. UBS is also a buy, with this broker expecting a good recovery in the next few years. UBS is noticing the recovery in the first quarter of infant formula with an English label.
The brokers at Macquarie Group Ltd (ASX: MQG) currently rate the business as a sell/underperform, with a price target of $5.20. That would be a mid-single digit decline over the next 12 months if the broker is right. Macquarie thinks that the profit margins don't seem as though they will be strong in the next few years.
Recovering demand but lower margins?
In the fourth quarter of FY21, A2 Milk 'recognised' stock write-downs and deliberately slowed sales, together with other planned initiatives, to reduce inventory levels and rebalance English label infant formula pricing across channels. It also swapped older distributor inventory with more recent stock to improve on-shelf product freshness.
When A2 Milk gave its latest trading update, it noted that English label infant formula sales in the first quarter of FY22 were down on the first quarter of FY21, but were "significantly up" on the fourth quarter of FY21. That fourth quarter of FY21 was constrained to reduce channel inventory levels.
English label infant formula sales are expected to be down in the first half of FY22 on the prior corresponding period, but ahead of expectations.
Turning to A2 Milk's earnings before interest, tax, depreciation and amortisation (EBITDA) margin expectations, A2 Milk said that the target margin is probably in the "teens" in the medium-term due to "expected" market conditions, investment and innovation.
Management also said that the target margin was "possibly" in the low-to-mid-20s in the medium-to-long-term subject to a market recovery that was better than expected, English label channel growth and market share gains.
A2 Milk share price valuation
Looking ahead to 2023, the Macquarie analysts think that A2 Milk shares are valued at 30x FY23's estimated earnings.
On Citi's numbers, the A2 Milk share price is valued at 27x FY23's estimated earnings.
