Is the A2 Milk (ASX:A2M) share price a top buy?

falling milk asx share price represented by frowning woman tasting sour milk

There are analysts out there that believe that the A2 Milk Company Ltd (ASX: A2M) share price could be worth looking at.

What has happened to the A2 Milk share price?

It has been a difficult time for long-term investors.

Since the start of 2021, A2 Milk shares have fallen 50%.

The past 12 months shows a decline of 60%.

From the peak in July 2020, it has dropped around 70%.

Just this month, investors learned that the company is facing a class action in the Supreme Court of Victoria. The proceedings, filed by Slater & Gordon Limited (ASX: SGH), are said to be brought on behalf of shareholders who bought shares on the ASX or NZSX between 19 August 2020 and 9 May 2021.

Regarding the lawsuit, A2 Milk thinks that it has complied with its disclosure obligations, denies any liability and will vigorously defend the proceedings. The company said it remains confident in the underlying fundamentals of the business and growth potential.

Why has the A2 Milk share price dropped so much?

In 2020, A2 Milk was riding high from the strength of demand for infant formula and other products as customers looked to stock their pantries.

But things have gone south since then.

In FY21 it reported revenue was down 30.3% to $1.21 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) fell 77.6% to $123 million (including $109 million of stock write-downs) and net profit after tax (NPAT) dropped 79.1% to $80.7 million.

A2 Milk explained that it was impacted by a significant decline in cross-border English label infant nutrition and other nutritional sales through daigou/reseller and e-commerce channels. This created substantial demand and supply volatility, which caused “material excess inventory issues that exacerbated the impact.”

In response to the large shift in the trading environment, A2 Milk took “significant action”, particularly in the fourth quarter of FY21, to address the excess inventory issues, increase marketing spending to drive demand, commence a review of its growth strategy and review options to deploy available capital.

Is it an opportunistic buy idea?

Views are mixed about the business.

Analysts at Credit Suisse don’t think so. The broker has a price target of $5.50 for the A2 Milk share price, suggesting it’s going to keep declining.

But there are others that are rather bullish, such as Citi. The brokers there have a price target of $7.20 for the A2 Milk share price. Citi noted the growth that supplier Synlait Milk Ltd (ASX: SM1) is expecting in FY22. Synlait said that it expects to return to robust profitability in FY22 with improved infant base powder volumes. By the end of FY23, Synlait is expecting to return to similar levels of profitability and operating cashflows as the years leading into FY21.

The brokers at Citi believes that demand is going to improve for A2 Milk.

A2 Milk itself said:

The board and management are confident in the underlying fundamentals of the business and that the growth opportunity in core markets remains strong. Coupled with opportunities for product innovation, category expansion and new markets, and supported by a healthy brand and strong balance sheet, the long-term outlook is positive. However, the outlook for FY22 remains challenging and uncertain and it will take time to recover.

The post Is the A2 Milk (ASX:A2M) share price a top buy? appeared first on The Motley Fool Australia.

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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.

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