The A2 Milk Company Ltd (ASX: A2M) share price is pushing higher on Thursday.
In afternoon trade, the struggling infant formula company’s shares are up 1% to $5.06.
While this gain is positive, it is little consolation for shareholders who have watched the A2 Milk share price fall 36% over the last 12 months.
Where next for the A2 Milk share price?
Unfortunately for shareholders, the small number of brokers that are bullish on the A2 Milk share price just got even smaller.
Up until recently, the team at Citi were positive on A2 Milk and had maintained a buy rating on its shares since the release of the company’s full year results for FY 2021 in August.
At that point, the broker had a buy rating and $7.20 price target on its shares and was encouraged by improvements in its inventory levels and the strength of its brand in China.
However, Citi has now become bearish on the company’s prospects and has downgraded its shares to a sell rating and slashed the price target on them to $4.80.
Based on the current A2 Milk share price, this implies potential downside of 5.1%.
Why is Citi bearish?
Citi made the move largely on concerns that COVID lockdowns impacting Chinese ports could cause supply issues in the country. It also highlights that recent reseller pricing on Chinese ecommerce platforms has been weak, which could be an indication of softening demand.
In addition, Citi has recently noted that dairy processor Synlait Milk Ltd (ASX: SM1) released its half year results recently. Within its presentation, A2 Milk’s partner advised that an onsite audit will be conducted by the Ministry for Primary Industries on behalf of China’s SAMR in June/July. This is later than previously expected and Citi has warned that there is no certainty that A2 Milk will secure approval again.
If approval were not granted, it would be a huge blow given that it would shut out A2 Milk’s China label products from mother and baby stores and domestic online channels. These make up over a third of sales at present. The broker also fears that it would damage its brand and potentially sales of its English label product.
Though, Citi concedes that should it gain approval, it could position it to win a greater share of the Chinese market.
Time will tell what happens, but Citi isn’t willing to hold its shares while it waits to find out.
The post Why this broker is bearish on the A2 Milk share price appeared first on The Motley Fool Australia.
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More reading
- Leading brokers name 3 ASX shares to sell today
- Why A2 Milk, IGO, Lynas, and Sayona shares are dropping
- What happened to the A2 Milk share price in March?
- Could the A2 Milk share price be in for a better month in April?
- What was the highest ever A2 Milk (ASX:A2M) share price?
Motley Fool contributor James Mickleboro 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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