Are A2 Milk shares a buy after the selloff?

This infant formula company's shares crashed almost 20% on Monday. Let's see what analysts think of that.

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A2 Milk Company Ltd (ASX: A2M) shares had a day to forget on Monday.

The infant formula company's shares ended the session almost 19% lower at $5.70.

Why did A2 Milk shares crash?

Investors were hitting the sell button on Monday in response to the company's FY 2024 results.

For the 12 months ended 30 June, A2 Milk reported a 5.2% increase in revenue to NZ$1,675.5 million. A key driver of this growth was its China & Other Asia segment, which reported a 14.1% increase in revenue.

On the bottom line, A2 Milk reported net profit after tax growth of 7.7% to NZ$167.6 million.

While this looks decent on paper, the market was expecting stronger from the company. So, this put some pressure on A2 Milk's shares.

But the main pressure came from management's guidance for FY 2025, which fell well short of expectations due to challenging trading conditions.

Broker reaction

Commenting on its result, analysts at Bell Potter said:

Revenue of NZ$1,676m was up +5% YOY (vs. BPe NZ$1,690m and guidance of low-to-mid-single growth). EBITDA of NZ$234.3m was up +7% YOY (vs BPe of NZ$237.3m and VA consensus of NZ$235.5m). EBITDA ex-MVM was NZ$254.8m (vs. BPe of NZ$266.5m). Underlying NPAT of NZ$167.6m was up +8% YOY (vs. BPe of NZ$172.9m and VA consensus of NZ$172.1m).

In respect to its guidance, the broker commented:

Key outlook comments include: (1) FY25e revenue guidance of mid-single digit revenue growth (BPe of +7.4% and VA consensus of +8.0%); (2) FY25e EBITDA margins are expected to be broadly consistent with FY24 levels at 14% (BPe of 15.4% and VA consensus of 15.2%), with 1H25 down YOY and 2H25 up; (3) FY25e operating cash conversion to be below 100% reflecting SM1 settlement payments.

Should you buy the dip?

While Bell Potter sees value emerging with A2 Milk shares, it isn't enough right now to recommend the company as a buy.

In response to the release, the broker has retained its hold rating with a reduced price target of $6.20 (from $7.05). This implies potential upside of almost 9% for investors over the next 12 months.

Commenting on its recommendation, the broker said:

Our Hold rating is unchanged. Trading at ~15x FY25e EBITDA, A2M has retraced from its recent highs. However, at current share price levels A2M continues to trade at a fairly material premium to both IMF (~8x FY25e EBITDA) and FMCG (~12x FY25e EBITDA) peers.

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 Scott Phillips.

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