I think that the A2 Milk Company Ltd (ASX: A2M) share price is a strong buy today.
The A2 Milk share price has declined by 11% over the past month. I think A2 Milk is one of the highest-quality S&P/ASX 200 Index (ASX: XJO) shares, so seeing it drop by more than 10% makes it look even better in my opinion.
The recent FY20 result
We get a true insight into the business performance of an ASX share when it reports its results. A2 Milk recently released its FY20 report which showed impressive growth.
Total revenue grew by 32.8% to NZ$1.73 billion. Earnings before interest, tax, depreciation and amortisation (EBITDA) went up by 32.9% to NZ$549.7 million and net profit after tax (NPAT) increased by 34.1% to NZ$385.8 million. Earnings per share (EPS) went up by 33.5% to NZ 52.39 cents.
It was a very strong result and the cash position of the business is enviable in my opinion. Operating cash flow was NZ$427.4 million for the year and it finished with a closing cash balance of NZ$854.2 million.
If you take the cash pile off the valuation, I think the A2 Milk share price looks even more attractive.
It was a very good FY20 result. But there are a few key reasons why I think it's a strong buy today:
International growth
I believe one of the most important factors for achieving good long-term growth is the ability to grow overseas. Australia and New Zealand are great countries, but the combined population is quite small. Europe, North America and Asia are very large markets.
A2 Milk is doing a great job of growing in Asia, specifically China, and the US.
The 'China and other Asia' segment saw revenue growth of 65.1% to NZ$699.4 million, with EBITDA growth of 66.7% to NZ$224.9 million. It's not far off being half of the earnings of the overall business. And it will get to that size if it keeps growing strongly like FY20.
It's doing so well with Chinese consumers. In FY20 its China label infant nutrition grew revenue by more than double to NZ$337.7 million. According to the Nielsen MBS 12 month market value share, its MBS value share was 2% at 30 June 2020, up from 1.7% at 31 December 2020 and 1.3% at 30 June 2019.
It's this growing market share that makes me particularly excited about A2 Milk in China. As it expands its distribution it is becoming further entrenched in the minds of consumers. In the second half of FY20 it grew its store footprint from 18,300 to 19,100 stores.
The success in China is a big reason why the A2 Milk share price has grown so much over the past few years. China will be an important part of the success over the next few years.
US milk revenue growth is also proving to be exciting too. In FY20 alone US revenue increased by 91.2% to NZ$66.1 million. Over 50% of the sales growth came from existing stores. During FY20, A2 Milk increased its store distribution from 13,100 stores to 20,300 stores at 30 June 2020. This growth was achieved despite COVID-19 related milk purchasing limits.
The US is a long-term growth runway and it's setting the scene well for the launch of other products there in the future.
Canada will soon start making A2 Milk some money after an exclusive licensing agreement with Agrifoods.
China, the US and Canada alone offer A2 Milk very attractive growth potential.
Investing in manufacturing capability
A2 Milk is planning to put some of its cash to work by buying a 75.1% stake in Mataura Velley Milk, a New Zealand dairy nutrition business which owns a recently-commissioned manufacturing facility. The investment by A2 Milk will be approximately NZ$270 million.
I think it's a smart move to secure more manufacturing capacity due to the increasing scale of the company. A2 Milk has quality relationships with Synlait Milk Ltd (ASX: SM1) and Fonterra Shareholders' Fund (ASX: FSF), but it would be smart to diversify its manufacturing further and actually have a controlling stake.
Valuation
The A2 Milk share price is currently valued at 27x FY22's estimated earnings. When you compare that to the profit growth rate and the growth runway it has, I think it's very reasonable.
Look at some of the highly popular ASX growth shares:
Altium Limited (ASX: ALU) is trading at 55x FY22's estimated earnings.
Appen Ltd (ASX: APX) is trading at 35x FY22's estimated earnings.
I think A2 Milk looks much more reasonable, and if it expands into Europe in the future then it has even more long-term growth potential.
A2 Milk could be the best ASX 200 share to buy for growth in my opinion.
