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I’d buy A2 Milk (ASX:A2M) shares this week

If I were buying one ASX share this week it’d be infant formula business A2 Milk Company Ltd (ASX:A2M) at the current price.
The post I’d buy A2 Milk (ASX:A2M) shares this week appeared first on Motley Fool Australia. –

A2M share price

At the current share price I’d buy A2 Milk Company Ltd (ASX: A2M) shares this week.

I really like the infant formula company. It has been a wonderful investment since it listed on the ASX and I think there is plenty more growth potential for the coming years.

Let’s just quickly recap the main highlights of the FY20 result:

A2 Milk FY20 result

For shareholders, the key figure was that earnings per share (EPS) rose 33.5% to NZ 52.39 cents. Net profit after tax (NPAT) rose by 34.1% to NZ$385.8 million. The EPS and profit growth are key for A2 Milk shares going higher

This growth was driven by revenue increasing by 32.8% to NZ$1.73 billion. Earnings before interest, tax, depreciation and amortisation (EBITDA) jumped by 32.9% to NZ$549.7 million. The EBITDA margin was 31.7% against a longer-term target of 30%.

Group infant nutrition revenue rose by 33.8% to NZ$1.42 billion. China label infant nutrition grew strongly, more than doubling to NZ$337.7 million. Overall China and other Asia segment revenue rose 65.1% to NZ$699.1 million.

USA milk revenue also rocketed higher, up 91.2% to NZ$66.1 million.

One of the great things about the result was there was growth across the board. Even the ANZ segment, which has been around the longest, managed to grew revenue by 14.6% to NZ$965.7 million and EBITDA increased by 19.9% to NZ$465.6 million.

Operating cash flow generated was NZ$427.4 million and it finished with a closing cash balance of NZ$854.2 million.

It has a great future

A2 Milk has a very compelling range of products. But it takes a while to win over new customers when they first come across the product. That means that the new store distribution it added in FY20, particularly in the second half, could continue to add new customers and revenue for a while. So I think A2 Milk has growth built-in for a couple of years even if it doesn’t increase its store distribution number.

In the second half of FY20 it grew its store footprint from 18,300 stores to 19,100 stores in China. In the US in FY20 it increased its store count to 20,300 stores, up from 17,500 stores from December 2019 and 13,100 stores at June 2019.

A2 Milk shares have plenty of growth potential from the US and China alone in my opinion.

It’s also just starting to generate earnings in Canada. In March 2020 it entered into an exclusive licensing agreement with Agrifoods International for the production, distribution, sales and marketing of A2 Milk branded liquid milk for the Canadian market. A2 Milk has provided access to intellectual property and marketing assets as well as proprietary systems and know-how relating to the local sourcing and processing. Agrifoods will distribute the products and fund the venture. The product has recently been launched to a number of customers in Western Canada.

In FY21 A2 Milk is expecting continued strong revenue growth whilst investing in marketing and the organisational capability. It’s expecting an FY21 EBITDA margin of 30% to 31%. It’s aiming for a longer-term EBITDA margin target of 30%.

Why I think the A2 Milk share price is a buy

A2 Milk shares have plenty of earnings growth potential, much more than the market is giving it credit for in my opinion.

The A2 Milk share price has fallen 16% since 18 August 2020 despite still having a very attractive growth runway.

FY21 will face some difficulties. Management said there will be higher raw and packaging material costs partially offset by price increases, an increase of marketing costs, foreign currency benefits not likely to be replicated and COVID-19 pantry stocking unlikely to reoccur again.

A2 Milk is now just trading at 24x FY23’s estimated earnings. I think this is a really good price to buy A2 Milk shares considering its global growth aspirations. A2 Milk may soon decide to pay out some excess capital to shareholders, which would improve shareholder returns.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post I’d buy A2 Milk (ASX:A2M) shares this week appeared first on Motley Fool Australia.

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