The a2 Milk Company Ltd (Australia) (ASX: A2M) share price hit a record high of $5.50 in Monday morning trade as investors bid the stock up after the dairy retailer made a presentation to a group of analysts and fund managers in Hong Kong.
The group sells a2-only-protein infant formula and supermarket milk with infant formula sales in Australia and China surging over FY 2017, while its supermarket milk is also delivering robust growth in its core Australia market.
For the financial year ending June 30 2017 the group posted operating income (EBITDA) of NZ$141.2 million on sales of NZ$549.5 million, with revenue in China more than doubling, while EBITDA in China more than tripled to NZ$32.8 million.
However, Australia and New Zealand remains its core market producing around 80% of total revenues. It's the a2-only-protein infant formula business that accounts for around 72% of sales, with investors expecting much of the growth out to FY 2020 to be driven by rising Chinese demand for the product.
Currently its Chinese labeled infant formula product only accounts for 8% of total revenues and evidently has a way to run if the company can navigate regulatory hurdles and crank online or in-store sales across the vast China market.
The company is also investing heavily on growth in the UK and US markets, which produced an operating income loss of $22.5 million over FY 2017, with revenue growth of 14.75% also relatively disappointing. The U.S. business proving especially costly, with the group not forecasting positive operating income in the region until FY 2020.
Outlook
Supporting the share price this morning is that today the group reaffirmed its intention to potentially pay a special dividend to investors, while commencing a share buyback program worth up to NZ$40 million over the next 12 months.
The group has $121 million cash in hand and is growing profits, so investors are expecting some kind of capital return, especially given it has flagged more "strong growth" in infant formula and milk powders in Australia and China over FY 2018.
While the outlook is bright at A$5.50 the stock is changing hands on around 48x trailing FX-adjusted earnings per share, which means it will have to deliver several years of double-digit compounded growth to justify today's valuation. As such I would rate the stock as a hold for now and would be surprised if we see it above $6 in 2017.
If you're looking for a business with similar growth characteristics on a better valuation I think vitamins maker Blackmores Limited (ASX: BKL) looks good value based on its accelerating sales for the quarter ending June 30 2017. Blackmores is also growing strongly in China and has a superior long-term track record to a2 Milk.
