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Here’s Why The A2 (ASX:A2M) Share Price Could Go Nuts

The A2 Milk Company Ltd (ASX:A2M) share price could go nuts today after the company released its half year report to 31 December 2018. 

The A2 Milk Company Ltd (ASX: A2M) share price could go nuts today after the company released its half year report to 31 December 2018.

The a2 Milk Company is one of Australia and New Zealand’s largest infant formula producers and the leader in a2-only protein-based dairy products. It has operations in New Zealand, Australia, USA and China thanks to key supply and distribution agreements.

Here’s what A2 Milk reported

A2 Milk has reported that total revenue grew by 41% to NZ$613.1 million. There were several factors for this revenue growth.

Australian fresh milk revenue increased by 11.7% and reached a record market share of 10.8%. US Milk revenue grew by 114.1% and distribution has now reached 10,000 stores. Group infant formula revenue was $495.5 million, up 45.3% with China label revenue growing 82.6%, total China sales grew 50.1% to NZ$171.7 million and the Chinese market share hit 5.7%, A2 Milk has brand leadership in Australia at 35.7%.

The company benefited from a gross profit margin increase due to the benefits of scale and product mix, with infant formula accounting for around 81% of sales.

A2 Milk’s EBITDA increased by 52.7% to NZ$218.4 million (click here to learn what EBITDA means). The dairy company achieved net profit after tax (NPAT) growth of 55.1% to NZ$152.7 million and earnings per share (EPS) growth of 52.9% to NZ20.9 cents.

Operating cashflow was NZ$112.3 million and the company had a closing cash balance of NZ$287.9 million. The company said cash conversion was impacted by the timing of tax and supplier payments and increased debtors and infant formula inventory.

A2 Milk said in a statement: “Following a very strong first half performance, and encouraged by growing market share in China, the company is now in a position to reinvest the benefits of scale into increased marketing activities in the second half…predominately in China, and the US.”

Is A2 Milk a buy?

The company expects the revenue growth rate to continue in the second half, that is broadly in line with the first half. The investment in marketing is expected to support revenue growth in FY20 and beyond, but will lead to lower EBITDA margins compared to the first half, estimated to be 31% to 32%.

According to Bell Potter, analysts were expecting a profit of NZ$140 million, so to generate NZ$152.7 million is a sizeable outperformance.

A2 Milk has been an excellent business in most reporting seasons over the past few years. The opportunity in China, the US and the UK are very large. The one thing I am concerned about is competition. Infant formula is not a product that you win a lifelong customer with, you need to constantly win new customers.

At the right entry price, A2 Milk could be a buy, but I don’t think that will be during today. When there are worries about China investors often seem to get a decent buying opportunity. Until there is a better price, the exciting growth shares in the free report below could be better.

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