Despite continuing woes in China, here’s what to like about A2 Milk shares

Could the embattled infant formula company’s shares be a bargain at current prices?

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Key points

  • A2 Milk shares have continued to tumble since June 2020, losing over 75% in value
  • Cross-border trade issues along with a reduction in Chinese birth rates have affected the company's operations
  • Despite the slump, a number of brokers believe the A2 Milk share price is attractively valued

Investors have been eagerly waiting for a turnaround for the A2 Milk Company Ltd (ASX: A2M) share price.

The embattled company’s shares have lost more than 75% since reaching an all-time high of $20.05 in June 2021.

At the time of writing, A2 Milk shares are trading 0.44%% lower to $4.56 apiece.

Why is the A2 Milk share price falling?

The COVID-19 pandemic has caused the infant formula company to face supply chain issues and margin pressure from increasing competition.

In addition to the cross-border trade issues, weakened growth in China has driven the A2 Milk share price to fall.

Management noted the challenging market conditions in its first half results, which included lower birth rate numbers recorded in China.

With a rapidly changing market landscape, A2 Milk has been forced to adapt.

Increasing brand investment to drive consumer demand along with other strategic growth priorities is paramount to A2 Milk.

As such, implementation is currently underway, with the company advising “good early progress across a range of initiatives”.

Furthermore, A2 Milk is expanding in new markets such as Malaysia, Singapore and Vietnam. This is on top of building its revenue base in New Zealand and the United States.

For the second half of FY22, A2 Milk expects to deliver revenue growth.

According to Catapult Wealth financial adviser Tim Haselum, this could lead to a recovery in 2023 and beyond.

Does the current share price represent good value?

A number of brokers believe that the A2 Milk share price is currently trading at a bargain price.

Following the company’s half-year financial scorecard, Macquarie analysts raised its 12-month price target by 7.7% to $5.60. Based on current share price, this implies an upside of 22% for investors.

On the other hand, the team at Citi lowered its outlook on the company’s shares by 1.8% to $7.02. While the broker reduced its assessment on A2 Milk, it still sees value in the fresh milk and infant formula company. The price target represents a potential upside of 54% from where it trades today.

Motley Fool contributor Aaron Teboneras owns A2 Milk. 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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