What's next for the A2 Milk (ASX:A2M) share price?

A2 Milk shares have been pretty volatile. What's next?

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Key points

  • The A2 Milk share price has suffered over the last year
  • Management think it’s through the worst and are expecting growth in the second half of FY22
  • Citi thinks it’s a buy, as it heads towards a turnaround

The A2 Milk Company Ltd (ASX: A2M) share price has gone on a rollercoaster ride since COVID-19 came along.

But the last 12 months show a sizeable decline. A2 Milk shares have plunged 42%.

The company sold vast amounts of infant formula as consumers stocked up their shelves for the lockdowns in 2020. But then demand shrank. The daigou significantly slowed down their purchasing. Chinese customers bought more products from Chinese companies.

A2 Milk ended up with more inventory and lower revenue. It had to take, and is taking, significant action to try to remedy things. An improving profit situation could provide a boost for the A2 Milk share price.

But the recent profit is still showing profit damage and decline.

Half-year result

It recently announced the report for the first six months of FY22.

A2 Milk said that market conditions continued to be challenging, with the Chinese infant formula market declining by 3.3% in value during the first half due mainly to the cumulative impact of a lower birth rate.

The company also said the Australian and US premium liquid milk markets saw growth.

Year on year, revenue was down 2.5% to $660.5 million. But this represented 24.8% growth in the second half of FY21.

Chinese label infant formula sales were constrained by A2 Milk in the first quarter to rebalance distributor inventory levels with sales down 11.4%. However, consumer offtake growth in-store and online was up by "double-digits" with a higher market share.

English and other label infant formula sales were down 9.8%, with a lower market share, but with an improvement in the sales trajectory during the half, particularly in the ANZ reseller channel.

Earnings before interest, tax, depreciation and amortisation (EBITDA) fell 45.3% to $97.6 million. The EBITDA margin was 14.8%, down from 26.4% a year ago. Net profit after tax (NPAT) fell 53.3% to $56.1 million.

But there may be promising times ahead, according to management.

Outlook for A2 Milk and the share price

It couldn't give any specific guidance for the rest of FY22.

However, it did say it's expecting Chinese label infant formula sales to be up in FY22. The second half is expected to be up "significantly" compared to the first half of FY22. This is due to the first half of FY22 having been impacted by distributor inventory rebalancing and in the second half as the company's growth strategy starts to have a positive impact on sales.

English label infant formula sales are also expected to be up in FY22, with growth in the second half of FY22 compared to the first half due to improved inventory levels and pricing, as well as improved execution in the ANZ reseller and cross-border e-commerce channels.

Liquid milk sale growth is also expected in Australia and the US.

The company said that growth is going better than expected, though the gross profit margin isn't expected to improve because of increasing milk, ingredient and packaging costs.

It's focused on a number of initiatives to drive future growth.

Analyst rating on the A2 Milk share price

Opinions are mixed. Macquarie still rates the business as 'underperform' because of strong competition and higher spending (particularly on marketing).

Meanwhile, Citi rates it as a buy with a price target of $7.02 because of expectations for being able to increase prices and the tactics to improve things despite the difficulties.

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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