Motley Fool Australia

3 reasons why the A2 Milk share price could be a buy

A2 Milk shares

The A2 Milk Company Ltd (ASX: A2M) share price has been suffering in recent months, but there some reasons why the company could be worth looking at.

What is A2 Milk?

A2 Milk is the nutritional business which offers a variety of products like infant formula, liquid milk, milk powder and ice cream.

The company started out in New Zealand but it’s now sold in many countries across the world.

Here are three reasons why the A2 Milk share price could be worth looking into:

International earnings

A2 Milk is an ASX share that doesn’t just rely on Australia and New Zealand for its earnings, unlike plenty of other large ASX shares.

It also generates significant earnings from China and the US.

In FY20 it made $965.7 million of revenue from its Australia and New Zealand segment, with earnings before interest, tax, depreciation and amortisation (EBITDA) of $465.6 million. The China and other Asia segment made $699.4 million of revenue, generating NZ$224.9 million of EBITDA.

The USA saw revenue of NZ$66.1 million, representing growth of 91.2%. It also boasted about the brand awareness more than doubling and the conversion rates went up significantly. It said in the FY20 result that over 50% of its sales growth was driven from existing stores. The USA distribution grew to 20,300 stores at the end of the financial year, up from 17,500 stores at December 2019 and 13,100 at the end of FY19. The company continues to aim for US$100 million of annualised sales from the US division.

Growing market share

A2 Milk has been building its market share in various categories for some time now, which could help increase customer loyalty and repeat demand.

In China’s mother and baby stores (MBS), its market share according to Nielsen was 1.3% in June 2019, 1.7% in December 2019 and 2% in June 2020. According to Smartpath, the cross-border e-commerce (CBEC) market share grew from 18.6% in June 2019, to 20.5% at December 2019 and 21.5% at June 2020.

A2 Milk is currently suffering from problems relating to Chinese demand, but the long-term growth of the market share could be a positive sign for the future. Indeed, despite A2 Milk’s overall difficulties – which I’ll get to soon – its MBS market share had grown to 2.3% at the end of October 2020 with increases in both same store sales and the number of new stores. In the first half of FY21, A2 Milk revenue growth for China label products in MBS is expected to be 40%.

Valuation

The A2 Milk share price has fallen heavily, it’s down almost 50% over the last six months. A2 Milk is now expecting FY21 first half revenue to be in the order of NZ$670 million, with a group EBITDA margin of around 27%.

Total FY21 revenue is expected to be between NZ$1.4 billion to NZ$1.55 billion, with an EBITDA margin of between 26% to 29%.

The reason why A2 Milk’s performance has been dropping is because there has been much lower demand in Australia from the local daigou. A2 Milk had hoped this trend would have reversed, but it hasn’t yet. The daigou can be important in activating demand in other channels like CBEC. A2 Milk is going to invest in the daigou channel to ‘reactivate’ it. 

But all of this disappointment has led to the A2 Milk share price fall, and a reduction in the valuation looking at longer-term earnings numbers on Commsec.

According to Commsec, the A2 Milk share price is valued at 22x FY22’s estimated earnings.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Related Articles…

Latest posts by Tristan Harrison (see all)