The A2 Milk Company Ltd (ASX: A2M) share price has been one of the stronger performers within the S&P/ASX 200 Index (ASX: XJO). In 2024 to date, it has gone up by 48%, as shown on the chart below. That compares to a rise of just 7% for the ASX 200 this year.
The infant formula business has delivered this rise despite a difficult trading environment in China, a key consumer of A2 Milk's products.
The number of newborns in China declined 5.6% in the 2023 calendar year to 9 million, though this represented an "improvement in trajectory over the past several years with a positive outlook" for the 2024 calendar year, according to A2 Milk. But, a longer-term decline is "expected due to socio-demographic trends".
Investors initially reacted badly to A2 Milk's FY24 result, with the share price dropping 24% on the day, but it has recovered much of that lost ground following the announcement of Chinese economic stimulus.
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Weakness in the infant formula market
A2 Milk disclosed in its FY24 result that the China infant formula market declined 8.6% in volume and 10.7% in value. The market decline reflected the "cumulative impact of fewer newborns, increased competitive intensity and challenging macroeconomic conditions."
Chinese-label infant formula market value declined 12.5%, with the mother and baby stores (MBS) channel down 16.1% and the domestic online channel down 12.2%. There has been significant pricing pressure impacted by the combination of volume pressure resulting from "fewer newborns, the market-wide transition to new GB registered products with clearance of old GB registered products, and challenging macroeconomic conditions."
A2 Milk disclosed that market dynamics and the market-wide GB registration transition have led to increasing brand concentration within the China infant formula market. With all top-5 brands winning market share, those major brands now represent over 54% of market value.
Earnings recap and guidance
Despite those difficult conditions, A2 Milk managed to deliver growth in FY24.
It reported revenue growth of 52% to $1.67 billion, operating profit (EBITDA) growth of 6.9% to $234.3 million and net profit growth of 7.7% to $167.6 million. FY24 earnings per share (EPS) grew by 9.2% to $23.2 million.
The company's net cash pile grew by 28% to $968.9 million over the 2024 financial year.
A2 Milk said the Chinese infant formula market remains challenging, and it expects further market value decline in FY25.
Despite that, it's expecting mid-single-digit revenue growth in FY25 compared to FY24, with growth affected by infant formula supply, which is expected to be resolved in the first half of FY25.
The FY25 gross profit margin is expected to be "broadly similar" to FY24, though the first half may show a decline due to airfreight costs.
Its operating profit/EBITDA margin is also expected to be "broadly similar" to FY24, according to the company, with the first-half margin forecast to be down, and the second-half margin projected to be up.
Is the A2 Milk share price a buy?
According to Factset, there are currently ten hold ratings on the business and five buy ratings.
While hold is the most numerous rating, the average rating is somewhat positive.
A target price by analysts tells us where the share price may be in 12 months from the time of that rating.
The average target price of these analysts is $6.80, which implies a possible rise of 8% from the current level.
