The coronavirus is causing share prices of some of the best growth shares on the ASX to fall. Is the A2 Milk Company Ltd (ASX: A2M) share price a buy?
Since 21 February 2020 the A2 Milk share price had actually risen by 4.7% to the end of last week. It's not suffering it seems.
Why has it risen?
Last month A2 Milk reported a solid set of numbers in its half-year result. Total revenue increased by 31.6% to NZ$806.7 million, earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 20.5% to NZ$263.2 million and net profit after tax (NPAT) went up 21.1% to NZ$184.9 million. Earnings per share (EPS) rose by 20.6% to NZ 25.15 cents.
The result was strong with the EBITDA margin stronger than expected at 32.6%.
Despite all the coronavirus problems around the world, management still predicted that revenue will grow strongly in its key regions during FY20 thanks to increasing marketing spending.
As A2 Milk said, its products are essential for many Chinese families (as well as Aussies and Americans), and demand is strong particularly through online and reseller channels.
Demand is so strong in-fact that revenue was above expectations in the first two months of the second half of FY20. However, the company is still expecting that the EBITDA margin will be in the range of 29% to 30% due to increased COGS expenses, more marketing spending and potential higher supply chain costs due to the coronavirus.
However, given the infection, management are assessing the marketing spending that can be effectively done in China.
So what does this mean?
It's attractive to find a company that is committed to keep investing in growth (marketing in this case) whilst also maintaining a solid 30% EBITDA margin for the medium-term.
Whether society is living as normal or in lockdown, young children will still need their infant formula. I can't see demand being affected too heavily.
A2 Milk is a business that's in a strong position. In the half-year it generated operating cashflow of NZ$160.6 million with a closing cash balance of NZ$618.4 million. Its balance sheet is in a secure position and the company has long-term growth prospects in China, the USA and all the other countries that it doesn't have a large presence in at the moment.
At the pre-open price, A2 Milk is trading at around 30x FY21's estimated earnings. Considering how low interest rates are, I think it's a pretty good price for its long-term growth potential. However, its share price could still drop in the next few weeks due to the coronavirus.
