Top broker tips A2 Milk (ASX:A2M) share price to jump 30%

Here's why this broker likes A2 Milk shares…

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The A2 Milk Company Ltd (ASX: A2M) share price has been under pressure this week.

Over the last two trading sessions, the embattled infant formula company's shares have fallen 9%.

This follows news that the company has been hit with a class action.

Is the A2 Milk share price in the buy zone?

According to a note out of Bell Potter, its analysts remain bullish on the A2 Milk share price.

The note reveals that the broker has retained its buy rating and $7.70 price target on its shares.

Based on the current A2 Milk share price of $5.92, this implies potential upside of 30% over the next 12 months.

What did the broker say?

Bell Potter has been looking at industry data and was happy with what it saw.

Its analysts highlight that infant formula exports to China rose 5% during August.

The broker commented: "Industry volumes rose +5% YOY in Aug'21, the second positive YOY outcome in the past four months. Volumes have been volatile in recent months, but in general terms are demonstrating signs of picking up from the lows seen in 2Q-3Q20. On a R3M basis, volumes are up +42% from the Jan'21 low."

It was a similar story for exports from Christchurch to China, which recorded a 6% increase in August. This is a positive as historically there has been "a high correlation between the value of exports to China ex-Christchurch (CHC) and A2M reported PRC revenues."

The broker also looked at infant formula imports into China from key markets and believes that things are improving.

Its analysts said: "The largest exporters of IMF to China are the EU, NZ and Australia. We view movements in volumes to China from these markets as indicative of overall market activity, with the R3M average removing monthly noise. While volumes continue to demonstrate double digit YOY declines (-28% YOY in Jul'21), sequentially volumes look to have formed a bottom in recent months, up +12% from Jan'21 lows."

Undemanding valuation

In light of the above, no changes have been made to its forecasts and Bell Potter continues to see value in the A2 Milk share price.

It concluded: "There is no change to our Buy rating, earnings forecasts or A$7.70ps target price. In recent months we have seen a bottoming in trade flows into China and closer alignment of trade flows into and out of Australia. Trading at 14.3x FY22e EBITDA exMVM/US losses we don't see A2M as particularly demanding relative to other China facing FMCG entities."

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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