Let’s not beat around the bush, milk and infant formula company A2 Milk Company Ltd (ASX: A2M) has had a good run in China. A2 Milk shares have jumped up from $6.71 at this time last year to reach heights of $13.17 mid this year, but with its share price back under $10, can we assume it’s run of luck is over for now? Don’t get me wrong, I think A2 Milk is a solid company. Its FY18 results detailed what was labelled as a “transformative year” for the company with total revenue of $922.7 million up 68%, EBITDA up…
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Let’s not beat around the bush, milk and infant formula company A2 Milk Company Ltd (ASX: A2M) has had a good run in China.
A2 Milk shares have jumped up from $6.71 at this time last year to reach heights of $13.17 mid this year, but with its share price back under $10, can we assume it’s run of luck is over for now?
Don’t get me wrong, I think A2 Milk is a solid company.
Its FY18 results detailed what was labelled as a “transformative year” for the company with total revenue of $922.7 million up 68%, EBITDA up 101% to $283 million and NPAT rising 116% to $195.7 million while its infant formula share strengthened 5% in China and 32% on home soil.
Over FY18, A2 Milk achieved substantial physical distribution growth in China – growing to upwards of 10,000 stores with more than 6000 stores in the US and enhanced strategic partnerships with Synlait Milk Ltd (ASX: SM1) and Fonterra Shareholders’ Fund (ASX: FSF).
The lion’s share of A2 Milk’s revenue has come from its infant nutrition products – $724.2 million of it, in fact – but despite its outstanding financial performance and undeniable progress on the delivery of its strategies, China is still a volatile market to be in for any Australian company.
A2 Milk reminded its shareholders back in early September it was “actively monitoring” China’s evolving regulatory framework with a new e-commerce framework to come into play on January 1, 2019.
The new laws will have a grace period, but overall, they are designed to protect Chinese consumers and the overall integrity of cross-border sales, not the companies that operate in the space.
It would be naïve to think this won’t have some noticeable impact on the way A2 Milk does business in China, with baby formula superstar stock Bellamy’s Australia Ltd (ASX: BAL) also guaranteed to be impacted.
In time, A2 Milk will likely adapt well to the regulatory environment changes in China, but there will be a period of downturn as its movement through the channels of distribution adjusts, and for this reason I would think of scooping some of the cream off my A2 holdings sometime soon, before it all comes into play.
Many investors did feel some nerves when A2 Milk’s new CEO Jayne Hrdlicka recently sold down some shares, and it’s fair to keep an eye on these types of movements if you are keen to take a prudent approach to growth stocks.
A2 Milk is still ticking boxes in terms of progress in China, in Australia and throughout the US, but the momentum appears to have slowed, and I’d probably think of taking some profit while the price is still right.
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Motley Fool contributor Carin Pickworth 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.