Has the worst been and gone for A2 Milk shares?

Are things sweet or sour for this fallen dairy business?

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Key points

  • COVID-19 was a tough time for A2 Milk, with a number of earnings downgrades
  • But, it's now expecting growth in FY23 and it has been approved to import infant formula into the US
  • Experts think that the business is turning around

The A2 Milk Company Ltd (ASX: A2M) share price has seen plenty of volatility over the last couple of years.

Since the start of July 2020, A2 Milk shares have fallen by around 70%.

But, interestingly, the company has gone on a strong run over the past six months, rising by 44%.

So, with the recent rise from the low, can investors say that the worst is over?

A2 Milk is expecting growth

After a couple of years of revenue declines, with regular earnings downgrades, A2 Milk is finally expecting to deliver growth again.

When the dairy company announced its FY22 result, it also gave some comments about expectations for FY23. It said that it's expecting continued revenue and earnings growth.

The company said that it's expecting high single-digit growth in FY23. FY23 first-half growth is expected to be "significantly higher" than the FY23 second half.

The FY23 gross profit margin is expected to be "broadly in line" with FY22, with cost of goods sold headwinds related to increasing milk, ingredient and packaging costs offset by price increases, product mix benefits and cost mitigation initiatives.

Overall, the business is expecting earnings before interest, tax, depreciation and amortisation (EBITDA) growth in FY23 and a modest improvement in the EBITDA margin. It's expecting the FY23 second-half EBITDA margin to be better than the first half.

Is the worst over?

The latest win for the business came as the United States Food and Drug Administration approved A2 Milk to supply infant milk formula to the US to help with the shortage there.

The FDA had deferred further consideration of A2 Milk's US application. But, after ongoing engagement with the FDA, the agency has given A2 Milk approval to supply infant formula. The business is expecting to sell up to 1 million cans, all within the second half of FY23.

According to reporting by the Australian Financial Review, Spheria Asset Management portfolio manager Matt Booker said:

It's done reasonably well despite the challenges and headwinds, particularly in China. They are growing again, and rolling out into more stores there.

My feeling is they won that a2 category years ago. They sold the brand hard into China, and it's hard to displace – consumers tend not to like copycats and rather have the original brand. I think the brand still resonates with Chinese consumers.

They are coming off that low base in terms of margins. I think they can get back to the 20 per cent EBITDA margins from where they are now. This is a far more sustainable business today.

The AFR also referred to Barrenjoey head of consumer research Tom Kierath liking the ASX share, saying the US news is incrementally positive, but not a "game changer", and China remains its opportunity.

Snapshot

Over the last month, the A2 Milk share price is up around 4%.

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 Scott Phillips.

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