The A2 Milk Company Ltd (ASX: A2M) share price has dropped 2% in March to date. But could April 2022 be a better month for the company?
The market sent A2 Milk shares up to $5.89 on the day of the company's FY22 half-year result. That report revealed that earnings before interest, tax, depreciation and amortisation (EBITDA) was down 45.3% to $97.6 million, while net profit after tax (NPAT) dropped 53.3% to $56.1 million.
However, the company is starting to talk about a recovery.
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FY22 half-year positive comments
Management said that the HY22 report was in line with the company's expectations and it's expecting to deliver revenue growth in FY22.
While HY22 revenue was "marginally" lower, down 2.5% to $660.5 million, it was up 24.8% on the second half of FY21.
The company said that China-label infant formula sales were constrained by A2 Milk in the first quarter of FY22 to rebalance distributor inventory levels. Those sales were down 11.4% year on year. However, there was consumer offtake growth in-store and online was up double-digits with a higher market share.
A2 Milk also said that while English and other label infant formula sales were down 9.8% year on year with lower market share, there was an improvement in the sales trajectory during the half. This was particularly in the ANZ [Australia-New Zealand] reseller channel.
The company also said that its brand health metrics improved after a significant marketing campaign in the second quarter, with Chinese-label metrics also improving. The brand 'investment' increased in the first half of FY22 by 37.3%.
Management pointed to A2 Milk's growth strategy refresh to respond to the rapidly-changing Chinese infant formula market dynamics. It said this refresh has been completed and implementation is underway, with "good early progress across key initiatives".
The company's final positive point was that its outlook for the FY22 second half has improved. The FY22 second half is expected to be "significantly" better than the second half of FY21 and also better than the first half of FY21. Growth in both Chinese-label and English-label infant formula is expected.
However, the higher revenue isn't expected to translate into higher earnings as the company invests significantly in marketing or other areas that will help its growth strategy.
What do brokers think of the A2 Milk share price?
Citi is one of the few brokers to be positive on the ASX share. Citi rates A2 Milk as a buy, with a price target of $7.02. That implies a potential rise of around 30% over the next month, if the broker ends up being right. The broker sees both risks and opportunities in the Chinese market for A2 Milk.
Meanwhile, Credit Suisse is neutral on the dairy business with a price target of $5.75.
In terms of the valuation, using Citi's numbers, the A2 Milk share price is valued at 38x FY22's estimated earnings and 29x FY23's estimated earnings.
