The market may be charging higher today, but the A2 Milk Company Ltd (ASX: A2M) share price hasn't been able to follow its lead.
In afternoon trade, the infant formula company's shares are down 1.5% to $5.87.
Why is the A2 Milk share price underperforming?
The weakness in the A2 Milk share price on Tuesday has been driven by the release of a broker note out of Bell Potter this morning.
According to the note, the broker has downgraded the company's shares to a hold rating with a reduced price target of $6.80.
While this still implies decent upside from current levels, the broker doesn't appear to believe the risk/reward is compelling enough to retain its buy rating.
What did the broker say?
Bell Potter has been analysing the results and commentary from A2 Milk's dairy processing partner Synlait Milk (ASX: SM1) and seems a touch concerned with what it saw.
The broker believes that A2 Milk could now be destined to fall short of consensus estimates in the near term. It explained:
The recent SM1 downgrade was reflective of changes to existing IMF customer orders, elevated cost structures (some of which is recoverable in customer agreements) and a delayed ramp-up of the new Pokeno nutritionals customer. What the SM1 result highlighted to us, was that our nutritionals forecasts for SM1 (and hence A2M IMF demand) have been softer than consensus expectations and this is also reflected in our below consensus FY24e A2M forecasts
We downgrade from Buy to Hold. Ultimately A2M and SM1 balance dates don't align and SM1 issues may simply reflect restocking and destocking decisions on the part of A2M around SAMR registration. While we like the long-term story in A2M, we are cognisant that FY24e market expectations are higher than ours and unfortunately we saw more in the recent SM1 1H23 result to support our current forecasts than make us consider materially upgrading them.
