In this article are 3 reasons why the A2 Milk Company Ltd (ASX:A2M) share price could be a buy. Valuation is one of the reasons.
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There are a few different reasons to be interested in watching the A2 Milk Company Ltd (ASX: A2M) share price.
What does A2 Milk do?
It’s a premium-branded dairy nutritional company which is focused on products containing the A2 beta-casein protein type. Its sales items like liquid milk, powdered milk, ice cream and infant formula.
Its products are sold in various places including New Zealand, Australia, China, the US, Vietnam and South Korea. It’s also testing a fresh milk presence in Singapore and recently launched into the Canadian market.
Here are three reasons to consider looking at A2 Milk shares:
The company has experienced difficulties this year because of impacts relating to COVID-19.
A2 Milk said it has seen disruption to the corporate daigou and reseller channel, particularly because of the restrictions in Victoria. The daigou revenue reduction was beyond its previous expectations and without the replenishment orders that would have been expected by that point.
Sales in the daigou channel represent a significant portion of infant formula sales in the Australia and New Zealand business.
However, sales made internationally are growing strongly. In FY20 A2 Milk achieved sales of $337.7 million for the Chinese label infant nutrition business, which was growth of over 100%. Its Chinese mother and baby store (MBS) value share was 2%, compared to 1.7% at 31 December 2019 and 1.3% at FY19. It also saw 40.3% growth of its English label infant nutrition cross border-commerce sales in FY20.
In the US it achieved 91.2% growth of its revenue, whilst earnings from Western Canada had just started.
A2 Milk’s recent trading update said that its US milk revenue continues to grow strongly, whilst the local China business is performing strongly as well.
Once local COVID-19 impacts subside, A2 Milk is expecting significant improvement in the second half of FY21 and beyond.
Strong balance sheet
Many businesses had to carry out a capital raising during the 2020 to ensure stability during the difficult COVID-19 conditions.
A2 Milk wasn’t one of those businesses that had to do a dilutive capital raising at a low share price.
That’s because it has a large amount of cash sitting on the balance sheet. At the end of FY20 it had a closing cash balance of NZ$854.2 million and no debt.
At the moment A2 Milk is contemplating using some of that cash, around NZ$385 million, to buy a 75.1% interest in Mataura Valley Milk. This business has recently constructed and commissioned a state of the art nutritional facility which could be used to complement A2 Milk’s existing supply relationships. Management think it’s well located for access to a growing productive milk pool supported by favourable climactic conditions and water availability.
Mataura Valley Milk has agreed to provide A2 Milk with a period of exclusivity to conduct confirmatory due diligence and negotiate definitive transaction documentation.
The A2 Milk share price has fallen down to almost $13. It didn’t even fall that low during the COVID-19 crash. It was November 2019 when it was last that low.
At this level, it’s priced at 23x FY22’s estimated earnings according to Commsec. This compares to other popular growth shares like Appen Ltd (ASX: APX) which is trading at 30x FY22’s estimated earnings.
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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Appen Ltd. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.