The A2 Milk (ASX:A2M) share price has 40% upside – broker

The A2 Milk Company Ltd (ASX: A2M) share price has plenty of potential upside. That’s according to one of the leading brokers in Australia.

Citi has put a price target on the business that implies that A2 Milk shares could rise by around 40% over the next year.

Whilst the company has gone through a lot of volatility over the last couple of years, management and the broker feel that things are now looking more promising.

The latest from A2 Milk

At the company’s annual general meeting (AGM), it acknowledged that FY21 was a disappointing result, with net profit after tax plunging 79.1% to $80.7 million. COVID-19 caused significant disruption and also led to excess inventory. This was partly caused by a reduction of the Chinese birth rate.

The A2 Milk share price has fallen 47% over the last year alone.

However, the company has taken a number of key actions to try to start a recovery.

It ‘recognised’ stock write-downs and deliberately slowed down sales in the fourth quarter of FY21, together with other planned initiatives, to reduce inventory levels and rebalance English label IMF pricing across channels

Another thing that A2 Milk did was swap older distributor inventory with more recent stock to improve on-shelf product freshness.

The infant formula company has increased its marketing to drive customer demand.

A2 Milk has also done some restructuring and hiring, with new talent and a re-focusing on the key business opportunities.

Citi likes the initiatives that the business has worked hard on improving its inventory position and notes the tactics it’s employing to turn things around.

Long-term ambitions

A2 Milk said that it has an ambition to grow sales to over NZ$2 billion and improve margins. This could be quite helpful for the A2 Milk share price.

It wants to regain half of the English label revenue from FY20 to FY21, through a channel recovery after COVID-19 impacts fade and also the execution of its English label strategy to gain market share.

A2 Milk also wants to double its Chinese label market share from 2.5% to 5%.

The ASX share also has plans to grow in other dairy and nutritional products to China through innovation and distribution growth. Other plans include growing in existing markets and two to three new markets as well as growth in milk and adjacent categories.

In terms of the earnings before interest, tax, depreciation and amortisation (EBITDA) margin, it’s targeting a margin “probably in the ‘teens’ in the medium-term due to expected market conditions, investment and innovation.”

Then, in the longer-term, the EBITDA margin is going to possibly be in the “low-to-mid-20s” subject to a higher-than-expected market recovery, English label channel growth and share gains.

A2 Milk share price target

Citi has a price target of $7.30. As already mentioned, that suggests the shares could rise by around 40% over the next year, if the broker ends up being right.

The post The A2 Milk (ASX:A2M) share price has 40% upside – broker 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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