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Why the A2 Milk Company Ltd share price is storming higher today

This morning the A2 Milk Company Ltd (ASX: A2M) share price jumped 4% to $10.25 after the supermarket milk and infant formula retailer reported a strong start to financial year 2019.

For the four months ending October 31 2018 A2 Milk reported that net profit grew 64.5% to NZ$86 million. In total operating income or EBITDA grew 58.5% to NZ$124.2 million on revenue of NZ$368.4 million, which itself was up 40.5%.

This translated into an EBITDA margin of 33.7%, however, the group’s CEO warned investors this result was a “timing issue” and that EBITDA margins are expected to fall back into line with FY 2018.

The CEO also flagged that the result was supported by favourable foreign exchange impacts, overall however this looks another very strong result from one of the ASX’s best consumer-facing growth businesses.

Its core Australian and New Zealand market is continuing to perform well and grow market share.

According to today’s update its fresh supermarket milk product commonly found in Woolworths Group Ltd (ASX: WOW) or Wesfarmers Ltd (ASX: WES) operated Coles, now has a record 10% market share.

In ANZ its infant formula product now has an impressive market share of 33%, up from 32% at the end of FY 2018. In effect then 1 in 3 infant formula tins sold at Australian supermarkets is now the premium priced a2 brand, which is some real dominance in a competitive market.

China as a2’s key growth market also appears to be growing strongly, with its market share at 5.6% from 5.1% as at the end of FY18. The group also reported that its count of stores for distribution has increased from 10,000 to 12,000 with sales of Chinese label infant formula tins growing 75% over the same four months last year.

The US market is also performing well with store count increasing from 6,000 to 9,000 since the end of FY 2018 and consumers reportedly taking to the milk well.

a2 Milk’s management reported that for the full year it expects strong revenue growth to continue, but at a slightly lower rate than the 40.5% achieved over the first four months of the year. The EBITDA to sales margin is expected to remain “broadly in line with FY 2018”.

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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.

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