The A2 Milk share price is falling again, could it be an opportunity?
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The A2 Milk Company Ltd (ASX: A2M) share price is falling again after a strong run in recent weeks. Could it now be an opportunity?
A2 Milk shares fell to almost $5 in the middle of May. But then the share price started going through a recovery. From that low, A2 Milk climbed around 40% to a high of $7.20 earlier this month. But it’s dropping again – down around 10% from the July high. It is 4% in the red today, at the time of writing.
There is still volatility for A2 Milk, despite the significant decline over the last 12 months.
But there are some brokers that don’t have a high opinion of A2 Milk’s share price prospects in the shorter-term despite the decline.
For example, Citi rates A2 Milk as a sell with a price target of $6.05. That suggests that the ASX share is going to see more declines over the next 12 months, if the broker is right.
Shifting consumer choices in China suggest that A2 Milk may not see much benefit from a change in China’s child policy to allow three children. Chinese families are increasingly going for local brands, particularly in smaller cities where people are even more likely to choose a Chinese product.
Credit Suisse is another broker that rates A2 Milk as a sell. But the price target is even lower, at just $5.50. The broker points out that the daigou sales are not contributing much to the overall picture now.
A2 Milk’s latest update
The last update from A2 Milk was in May.
It said that the trading dynamics in the China infant nutrition market have been and continue to be challenging for the company as well as international formula peers.
The FY21 third quarter was broadly in line with its plan, but A2 Milk said it was clear the actions taken to address challenges in the daigou and cross-border e-commerce channels will not result in sufficient improvement on the third quarter of FY21 in pricing, sales and inventory levels to meet previous guidance.
After reviewing its inventory, management noted that challenges were being exacerbated by excess inventory and difficulties with visibility. So it decided to take more aggressive action to address excess inventory which will impact FY21 revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) and potentially the first quarter of FY22. This inventory action will give Chinese mothers with the freshest infant milk formula and benefit the company’s customers, distributors and partners.
A2 Milk is also increasing its marketing to drive customer demand.
However, despite these short-term setbacks, management are confident in the long-term opportunity that the infant nutrition market in China represents, and the company is determined to build on the strong position it has built in the market over the last five years.
In that May update, one area of growth was that its store count increased to 22,600. The 12-month rolling market value share in mother and baby stores (MBS) was stable at 2.4%
But, the company recognises that the Chinese market and channel structure is changing rapidly and has therefore commenced a comprehensive process to review its growth strategy and executional plans to respond to this new environment.
A2 Milk is also thinking about a potential share buyback to utilise its capital.
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Motley Fool contributor Tristan Harrison 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.