The A2 Milk Company Ltd (ASX: A2M) share price has gone up by 26% in a month. Can it keep going up?
What’s going on with the A2 Milk share price?
A2 Milk shares have risen around 26% over the last month. That’s a large rise in a short amount of time for one of the most unloved businesses in the ASX 200 (ASX: XJO).
The business is still down heavily – 32% over six months and 63% in the last year. But it’s (potentially) a good start to a recovery for shareholders.
However, there hasn’t been any particular company news that might explain that type of reaction. Though the appointment of Chief Marketing Officer Edith Bailey (from her role of Consumer Marketing Director, ANZ, with Danone Nutricia’s Specialised Nutrition division) was a good win.
The latest we heard from the company was that trading in the China infant nutrition market had been (and is/was) challenging for A2 Milk and international competitors. Actions taken to address challenges in the daigou space and cross border e-commerce (CBEC) channels were not enough to improve trading from the FY21 third quarter (relating to pricing, sales and inventory) to meet previous guidance.
It was such a difficult situation that A2 Milk said it would take more aggressive actions to address excess inventory which will impact FY21 revenue and EBITDA (EBITDA explained) and potentially the first quarter of FY22.
A2 Milk is reviewing the China market and channel structure to review its growth strategy and execution plans to respond to this new environment. The board also said it was considering a share buyback.
The underlying EBITDA margin is now expected to be between 11% to 12% for FY21, with a revenue target of between $1.2 billion to $1.25 billion (which is much lower than earlier guidance targets).
An immediate recovery was not expected.
But it continues to rise
Despite all of those problems, investors are sending shares higher. Perhaps the market thought the A2 Milk share price represented good value at the much lower level, with potential expectations of a long-term recovery. You’d have to ask each investor that bought shares why they’re happy to buy at a higher price now.
Some analysts are still negative on the company, pointing to stronger domestic Chinese brands that are taking market share and that A2 Milk’s margins may not be as strong in the future.
However, UBS thinks that A2 Milk’s efforts are starting to work and it’s predicting that daigou revenue can improve in the next few years, as well as stronger sales through the mother and baby stores in China.
Using CommSec numbers and the last A2 Milk share price, it’s valued at 27 times the estimated earnings for the 2023 financial year. If the recovery is quicker than expected, it could still be an opportunistic time to think about shares. But I’m not sure about that.
