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Why I think a2 Milk Company Ltd could be a buy for capital growth in 2018

The a2 Milk Company Ltd (ASX: A2M) share price climbed 2.4% to $7.60 on the back of the company announcing that it will expand its presence in the US by entering the north-east region from January 2018.  

Entering the north-east region of the US will allow A2 Milk to increase its presence in US retail stores by approximately 39% from 3,600 retail stores to 5,000 retail stores. Moreover, the strategic decision to enter the region will be complemented by investment in the ‘Love Milk Again’ advertising campaign which aims to raise customer awareness of A2 Milk’s products.  

The A2 Milk Company is a business involved in manufacturing, marketing and selling dairy and infant milk products in various regions including Australia, New Zealand, China, US and the UK.

The key difference between A2 Milk and normal milk is that A2 milk only contains A2 protein in comparison to normal milk which contains both A1 and A2 protein. Research has shown that the A2 protein is easier to digest than the A1 protein and the A2 Milk Company has invested extensively to protect its IP.  

In FY17, A2 Milk reported revenue of $549.5 million and net profit after tax (NPAT) of $90.6 million dollars. This was an impressive achievement because revenue increased by 56%, while NPAT increased by 198%.

Breakdown of FY17 revenue reveals that 80% of revenue was generated from the Australia & New Zealand region, 16% of revenue was from the China & Asia region and only 4% of revenue came from the US & UK region. However, through A2M’s strategy of expanding its distribution in US retail stores and advertising campaigns to build brand awareness, it’s expected that revenue from the US & UK region will continue to grow and make up a greater proportion of total revenue.  

Foolish takeaway  

As A2 Milk invests heavily in other regions such as the US & UK, this will allow A2 Milk to grow and diversify its revenue stream. This will be supported by strong growth in existing markets such as the Chinese market where there is a growing middle class.   

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Motley Fool contributor Andrew Chen  has no financial interest in any a2 Milk. 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 Bruce Jackson.

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