a2 Milk shares: key broker upgrades stock from sell to hold

Bell Potter has today upgraded their price target and rating of the A$9.0 billion a2 Milk Company.

Brokers mostly seem to hold a uniform view on a2 Milk’s (ASX: A2M) shares these days.

The gist of this view? Earnings margins are likely to be squeezed as A2M makes heavy investments in marketing and internal capacity. The thinking here is that revenue will hopefully be higher as a2 Milk rages headlong into unlocking the gargantuan potential of the Chinese market.

At that point: the views become more fuzzy.

Ultimately as well, thus far these plans haven’t really resonated with the market; with A2M’s share price retreating some 30% since its July peak.

A2 Milk share price in focus

Volatility aside, Bell Potter has today lifted their view on a2 Milk (ASX: A2M), upgrading the stock from sell to hold and slapping a A$12.35 price target on the now A$9.0 billion company.

Such a view may have very well contributed to the 1.95% share price bump we saw this morning, as a2 Milk’s stock ran up to A$12.55 per share in the opening hour of trade. A good morning for sure, though well-behind the company’s A$17 per share mark (achieved in July); moreover, the ASX 200 was up some 0.9% just before noon, as well.

Indeed, for those who usually jump for joy at broker upgrades, investors are unlikely to find much bullishness here.

Bell Potter previously posited that the market misunderstood the revenue growth/ earnings interplay of the market darling. However, the broker now believes the market has a better understanding of these dynamics – this, in addition to the recent share price run down – has led Bell Potter to upgrade their rating from sell to hold.

Yet even at today’s price levels, a2 Milk does indeed still trade ahead of the market, with a price-to-earnings (PE) ratio of 32.8.

Risks, risks and more risks

There was no shortage of risks highlighted in Bell Potter’s latest research note on A2M either. From scientific risk, competition risk, key personnel risk, execution risk and even supply chain disruption.

Maybe most interesting however, was China Regulatory Risk. To be clear, Bell Potter is not expecting any material changes on this front as it is relevant to A2M’s operations. Still, the point remains salient: China stands as a key growth lever for the company and any potential disruption down-the-line would likely prove problematic.

Year-to-date, a2 Milk (ASX: A2M) has still trended ahead of the market, rising 20.4% in that time.

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